Today we'll evaluate Molson Coors Canada Inc. (TSE:TPX.B) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 Molson Coors Canada:
0.015 = US$143m ÷ (US$11b - US$1.4b) (Based on the trailing twelve months to March 2019.)
So, Molson Coors Canada has an ROCE of 1.5%.
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Is Molson Coors Canada's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Molson Coors Canada's ROCE is meaningfully below the Beverage industry average of 5.3%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Molson Coors Canada's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Molson Coors Canada is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Molson Coors Canada's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Molson Coors Canada has total assets of US$11b and current liabilities of US$1.4b. As a result, its current liabilities are equal to approximately 13% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
What We Can Learn From Molson Coors Canada's ROCE
That's not a bad thing, however Molson Coors Canada has a weak ROCE and may not be an attractive investment. You might be able to find a better investment than Molson Coors Canada. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.