Today we are going to look at Molson Coors Brewing Company (NYSE:TAP) to see whether it might be an attractive investment prospect. 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.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Brewing:
0.054 = US$1.4b ÷ (US$30b - US$4.1b) (Based on the trailing twelve months to June 2019.)
So, Molson Coors Brewing has an ROCE of 5.4%.
Is Molson Coors Brewing's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Molson Coors Brewing's ROCE appears meaningfully below the 10% average reported by the Beverage industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Molson Coors Brewing stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
In our analysis, Molson Coors Brewing's ROCE appears to be 5.4%, compared to 3 years ago, when its ROCE was 2.6%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Molson Coors Brewing's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Molson Coors Brewing's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Molson Coors Brewing has total liabilities of US$4.1b and total assets of US$30b. As a result, its current liabilities are equal to approximately 14% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Molson Coors Brewing's ROCE
That's not a bad thing, however Molson Coors Brewing has a weak ROCE and may not be an attractive investment. Of course, you might also be able to find a better stock than Molson Coors Brewing. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.