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Why You Should Care About Coca-Cola European Partners plc’s (AMS:CCEP) Low Return On Capital

Felix Olson

Today we’ll look at Coca-Cola European Partners plc (AMS:CCEP) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to 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 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. Ultimately, it is a useful but imperfect metric. 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 Coca-Cola European Partners:

0.093 = €1.3b ÷ (€19b – €3.7b) (Based on the trailing twelve months to September 2018.)

So, Coca-Cola European Partners has an ROCE of 9.3%.

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Is Coca-Cola European Partners’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Coca-Cola European Partners’s ROCE is around the 9.3% average reported by the Beverage industry. Separate from Coca-Cola European Partners’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Coca-Cola European Partners currently has an ROCE of 9.3%, less than the 17% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

ENXTAM:CCEP Last Perf January 16th 19

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Coca-Cola European Partners.

Do Coca-Cola European Partners’s Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.

Coca-Cola European Partners has total assets of €19b and current liabilities of €3.7b. Therefore its current liabilities are equivalent to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Coca-Cola European Partners’s ROCE

This is good to see, and with a sound ROCE, Coca-Cola European Partners could be worth a closer look. But note: Coca-Cola European Partners may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Coca-Cola European Partners better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.