Be Wary Of Kofola CeskoSlovensko (SEP:KOFOL) 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, Kofola CeskoSlovensko (SEP:KOFOL) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Kofola CeskoSlovensko:

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

0.078 = Kč444m ÷ (Kč8.2b - Kč2.5b) (Based on the trailing twelve months to June 2020).

Therefore, Kofola CeskoSlovensko has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.

Check out our latest analysis for Kofola CeskoSlovensko

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'd like to look at how Kofola CeskoSlovensko has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Kofola CeskoSlovensko's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kofola CeskoSlovensko becoming one if things continue as they have.

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 39% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Kofola CeskoSlovensko does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Kofola CeskoSlovensko 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. 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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