Is Coca-Cola Consolidated, Inc. (NASDAQ:COKE) Struggling With Its 5.3% Return On Capital Employed?
Today we'll evaluate Coca-Cola Consolidated, Inc. (NASDAQ:COKE) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Coca-Cola Consolidated:
0.053 = US$134m ÷ (US$3.1b - US$602m) (Based on the trailing twelve months to June 2019.)
So, Coca-Cola Consolidated has an ROCE of 5.3%.
See our latest analysis for Coca-Cola Consolidated
Does Coca-Cola Consolidated Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Coca-Cola Consolidated's ROCE appears to be significantly below the 10% average in the Beverage industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Coca-Cola Consolidated compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.
The image below shows how Coca-Cola Consolidated's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. ROCE is, after all, simply a snap shot of a single year. You can check if Coca-Cola Consolidated has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Coca-Cola Consolidated's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.
Coca-Cola Consolidated has total liabilities of US$602m and total assets of US$3.1b. As a result, its current liabilities are equal to approximately 19% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Coca-Cola Consolidated's ROCE
While that is good to see, Coca-Cola Consolidated has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Coca-Cola Consolidated. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 editorial-team@simplywallst.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.
