U.S. Markets open in 6 hrs 29 mins
  • Gold

    1,785.40
    +0.50 (+0.03%)
     
  • EUR/USD

    1.1648
    -0.0004 (-0.0349%)
     
  • 10-Yr Bond

    1.6360
    0.0000 (0.00%)
     
  • Vix

    15.49
    -0.21 (-1.34%)
     
  • GBP/USD

    1.3802
    -0.0023 (-0.1684%)
     
  • USD/JPY

    114.0040
    -0.3250 (-0.2843%)
     
  • BTC-USD

    64,694.73
    +847.01 (+1.33%)
     
  • CMC Crypto 200

    1,527.54
    +46.74 (+3.16%)
     
  • FTSE 100

    7,223.10
    +5.57 (+0.08%)
     
  • Nikkei 225

    28,708.58
    -546.97 (-1.87%)
     

Andrew Peller (TSE:ADW.A) Might Be Having Difficulty Using Its Capital Effectively

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Andrew Peller (TSE:ADW.A) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.093 = CA$45m ÷ (CA$543m - CA$55m) (Based on the trailing twelve months to March 2021).

Therefore, Andrew Peller has an ROCE of 9.3%. Ultimately, that's a low return and it under-performs the Beverage industry average of 13%.

View our latest analysis for Andrew Peller

roce
roce

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Andrew Peller's ROCE Trend?

On the surface, the trend of ROCE at Andrew Peller doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Andrew Peller has done well to pay down its current liabilities to 10% 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...

In summary, Andrew Peller is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Andrew Peller that you might find interesting.

While Andrew Peller may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.