Some Investors May Be Worried About Andrew Peller's (TSE:ADW.A) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Andrew Peller (TSE:ADW.A) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Andrew Peller, this is the formula:

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

0.043 = CA$22m ÷ (CA$546m - CA$46m) (Based on the trailing twelve months to December 2021).

Thus, Andrew Peller has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Beverage industry average of 11%.

Check out our latest analysis for Andrew Peller

Above you can see how the current ROCE for Andrew Peller compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Andrew Peller here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Andrew Peller doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Andrew Peller might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Andrew Peller has done well to pay down its current liabilities to 8.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Andrew Peller's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 32% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Andrew Peller we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Andrew Peller isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.