The Returns On Capital At Molson Coors Canada (TSE:TPX.B) Don't Inspire Confidence

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Molson Coors Canada (TSE:TPX.B), so let's see why.

Understanding 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. The formula for this calculation on Molson Coors Canada is:

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).

So, Molson Coors Canada has an ROCE of 0.1%. Ultimately, that's a low return and it 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'd like to look at how Molson Coors Canada has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Molson Coors Canada, given the returns are trending downwards. About five years ago, returns on capital were 1.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Molson Coors Canada to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Molson Coors Canada is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Molson Coors Canada (of which 1 is significant!) that you should know about.

While Molson Coors Canada may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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