Why PBG S.A.’s (BVMF:PTBL3) Return On Capital Employed Looks Uninspiring

Today we'll look at PBG S.A. (BVMF:PTBL3) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?

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 PBG:

0.022 = R$29m ÷ (R$2.0b - R$758m) (Based on the trailing twelve months to March 2020.)

Therefore, PBG has an ROCE of 2.2%.

Check out our latest analysis for PBG

Is PBG's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, PBG's ROCE appears meaningfully below the 9.2% average reported by the Building industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how PBG stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

We can see that, PBG currently has an ROCE of 2.2%, less than the 10% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how PBG's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. You can check if PBG has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do PBG'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. 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.

PBG has total assets of R$2.0b and current liabilities of R$758m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. With a medium level of current liabilities boosting the ROCE a little, PBG's low ROCE is unappealing.

Our Take On PBG's ROCE

So researching other companies may be a better use of your time. 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).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.