Be Wary Of Molson Coors Canada (TSE:TPX.B) And Its Returns On Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Molson Coors Canada (TSE:TPX.B) we aren't filled with optimism, but let's investigate further.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Molson Coors Canada, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0013 = US$12m ÷ (US$10b - US$1.4b) (Based on the trailing twelve months to September 2020).
Therefore, Molson Coors Canada has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.
View our latest analysis for Molson Coors Canada
Historical performance is a great place to start when researching a stock so above you can see the gauge for Molson Coors Canada's ROCE against it's prior returns. If you're interested in investigating Molson Coors Canada's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Molson Coors Canada's ROCE Trending?
There is reason to be cautious about Molson Coors Canada, given the returns are trending downwards. To be more specific, the ROCE was 1.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Molson Coors Canada to turn into a multi-bagger.
Our Take On Molson Coors Canada's ROCE
In summary, it's unfortunate that Molson Coors Canada is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 46% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing to note, we've identified 1 warning sign with Molson Coors Canada and understanding this should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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About TSX:TPX.B
Molson Coors Canada
Molson Coors Canada Inc. brews, markets, sells, and distributes various beer brands in the Americas, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and internationally.
Unattractive dividend payer very low.