Today we are going to look at Monster Beverage Corporation (NASDAQ:MNST) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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’.
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 Monster Beverage:
0.31 = US$1.4b ÷ (US$5.1b – US$706m) (Based on the trailing twelve months to June 2019.)
Therefore, Monster Beverage has an ROCE of 31%.
Is Monster Beverage’s ROCE Good?
One way to assess ROCE is to compare similar companies. Monster Beverage’s ROCE appears to be substantially greater than the 10% average in the Beverage industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Monster Beverage’s ROCE in absolute terms currently looks quite high.
You can see in the image below how Monster Beverage’s ROCE compares to its industry.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Monster Beverage’s Current Liabilities Skew 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.
Monster Beverage has total liabilities of US$706m and total assets of US$5.1b. As a result, its current liabilities are equal to approximately 14% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
Our Take On Monster Beverage’s ROCE
, There might be better investments than Monster Beverage 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.
I will like Monster Beverage better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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