Yahoo Finance A Close Look At Corby Spirit and Wine Limited’s (TSE:CSW.A) 18% ROCE
Today we'll evaluate Corby Spirit and Wine Limited (TSE:CSW.A) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Corby Spirit and Wine:
0.18 = CA$35m ÷ (CA$225m - CA$34m) (Based on the trailing twelve months to December 2019.)
Therefore, Corby Spirit and Wine has an ROCE of 18%.
View our latest analysis for Corby Spirit and Wine
Does Corby Spirit and Wine Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Corby Spirit and Wine's ROCE is meaningfully higher than the 11% average in the Beverage industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Corby Spirit and Wine compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Corby Spirit and Wine's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Corby Spirit and Wine has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Corby Spirit and Wine's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Corby Spirit and Wine has total assets of CA$225m and current liabilities of CA$34m. As a result, its current liabilities are equal to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Corby Spirit and Wine's ROCE
Overall, Corby Spirit and Wine has a decent ROCE and could be worthy of further research. Corby Spirit and Wine looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
