Today we'll look at Campbell Soup Company (NYSE:CPB) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.
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 Campbell Soup:
0.14 = US$1.5b ÷ (US$14b - US$3.5b) (Based on the trailing twelve months to April 2019.)
So, Campbell Soup has an ROCE of 14%.
Does Campbell Soup Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Campbell Soup's ROCE is meaningfully better than the 8.1% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Campbell Soup's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Campbell Soup's current ROCE of 14% is lower than 3 years ago, when the company reported a 22% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Campbell Soup's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Campbell Soup's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Campbell Soup has total assets of US$14b and current liabilities of US$3.5b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Campbell Soup's ROCE
This is good to see, and with a sound ROCE, Campbell Soup could be worth a closer look. There might be better investments than Campbell Soup out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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 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.