Today we'll evaluate Coca-Cola Amatil Limited (ASX:CCL) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 Amatil:
0.14 = AU$645m ÷ (AU$6.6b - AU$1.9b) (Based on the trailing twelve months to December 2019.)
So, Coca-Cola Amatil has an ROCE of 14%.
Check out our latest analysis for Coca-Cola Amatil
Does Coca-Cola Amatil Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Coca-Cola Amatil's ROCE appears to be substantially greater than the 8.0% average in the Beverage industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Coca-Cola Amatil compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Coca-Cola Amatil's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Coca-Cola Amatil.
Coca-Cola Amatil's Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Coca-Cola Amatil has current liabilities of AU$1.9b and total assets of AU$6.6b. As a result, its current liabilities are equal to approximately 28% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Coca-Cola Amatil's ROCE
Overall, Coca-Cola Amatil has a decent ROCE and could be worthy of further research. There might be better investments than Coca-Cola Amatil out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
Coca-Cola Amatil is not the only stock that insiders are buying. 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.
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