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

By
Simply Wall St
Published
November 03, 2021
TSX:TPX.B
Source: Shutterstock

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Molson Coors Canada (TSE:TPX.B), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Molson Coors Canada:

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%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.

Check out our latest analysis for Molson Coors Canada

roce
TSX:TPX.B Return on Capital Employed November 4th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

We are a bit worried about the trend of returns on capital at Molson Coors Canada. To be more specific, the ROCE was 1.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Molson Coors Canada (of which 2 are a bit concerning!) that you should know about.

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.