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Why We’re Not Keen On Fresh Del Monte Produce Inc.’s (NYSE:FDP) 3.9% Return On Capital

Simply Wall St
·4 mins read

Today we are going to look at Fresh Del Monte Produce Inc. (NYSE:FDP) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Fresh Del Monte Produce:

0.039 = US$111m ÷ (US$3.3b - US$539m) (Based on the trailing twelve months to September 2019.)

Therefore, Fresh Del Monte Produce has an ROCE of 3.9%.

View our latest analysis for Fresh Del Monte Produce

Does Fresh Del Monte Produce Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Fresh Del Monte Produce's ROCE appears to be significantly below the 9.5% average in the Food industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Fresh Del Monte Produce 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.

We can see that, Fresh Del Monte Produce currently has an ROCE of 3.9%, less than the 12% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Fresh Del Monte Produce's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:FDP Past Revenue and Net Income, February 3rd 2020
NYSE:FDP Past Revenue and Net Income, February 3rd 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. 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 Fresh Del Monte Produce.

What Are Current Liabilities, And How Do They Affect Fresh Del Monte Produce's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Fresh Del Monte Produce has total assets of US$3.3b and current liabilities of US$539m. Therefore its current liabilities are equivalent to approximately 16% 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 Fresh Del Monte Produce's ROCE

Fresh Del Monte Produce has a poor ROCE, and there may be better investment prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.