Majestic Wine plc’s (LON:WINE) Investment Returns Are Lagging Its Industry
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Today we’ll evaluate Majestic Wine plc (LON:WINE) 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Majestic Wine:
0.04 = UK£9.3m ÷ (UK£275m – UK£129m) (Based on the trailing twelve months to October 2018.)
Therefore, Majestic Wine has an ROCE of 4.0%.
View our latest analysis for Majestic Wine
Is Majestic Wine’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Majestic Wine’s ROCE appears to be significantly below the 9.1% average in the Consumer Retailing industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Majestic Wine 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.
Majestic Wine’s current ROCE of 4.0% is lower than 3 years ago, when the company reported a 9.5% ROCE. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Majestic Wine.
How Majestic Wine’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Majestic Wine has total liabilities of UK£129m and total assets of UK£275m. As a result, its current liabilities are equal to approximately 47% of its total assets. Majestic Wine has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
What We Can Learn From Majestic Wine’s ROCE
There are likely better investments out there. You might be able to find a better buy than Majestic Wine. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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. On rare occasion, data errors may occur. Thank you for reading.
