Yahoo Finance Returns On Capital At Andrew Peller (TSE:ADW.A) Paint A Concerning Picture
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Andrew Peller (TSE:ADW.A), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Andrew Peller:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = CA$22m ÷ (CA$546m - CA$46m) (Based on the trailing twelve months to December 2021).
Therefore, Andrew Peller has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 11%.
Check out our latest analysis for Andrew Peller
In the above chart we have measured Andrew Peller's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Andrew Peller.
The Trend Of ROCE
On the surface, the trend of ROCE at Andrew Peller doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.3%. However it looks like Andrew Peller might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Andrew Peller has done well to pay down its current liabilities to 8.4% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Andrew Peller's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with Andrew Peller (including 2 which can't be ignored) .
While Andrew Peller isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
