U.S. Markets closed

Why We’re Not Keen On Celsius Holdings, Inc.’s (NASDAQ:CELH) 0.8% Return On Capital

Simply Wall St

Today we'll look at Celsius Holdings, Inc. (NASDAQ:CELH) 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Celsius Holdings:

0.0078 = US$496k ÷ (US$74m - US$11m) (Based on the trailing twelve months to September 2019.)

So, Celsius Holdings has an ROCE of 0.8%.

Check out our latest analysis for Celsius Holdings

Does Celsius Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Celsius Holdings's ROCE is meaningfully below the Beverage industry average of 12%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Celsius Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. There are potentially more appealing investments elsewhere.

Celsius Holdings delivered an ROCE of 0.8%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can click on the image below to see (in greater detail) how Celsius Holdings's past growth compares to other companies.

NasdaqCM:CELH Past Revenue and Net Income, January 14th 2020

When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Celsius Holdings.

What Are Current Liabilities, And How Do They Affect Celsius Holdings's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Celsius Holdings has total assets of US$74m and current liabilities of US$11m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From Celsius Holdings's ROCE

Celsius Holdings has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than Celsius Holdings. 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).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.