If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Kofola CeskoSlovensko (SEP:KOFOL), so let's see why.
Return On Capital Employed (ROCE): What is it?
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 Kofola CeskoSlovensko, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = Kč373m ÷ (Kč7.5b - Kč2.2b) (Based on the trailing twelve months to December 2020).
Therefore, Kofola CeskoSlovensko has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 9.2%.
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.
So How Is Kofola CeskoSlovensko's ROCE Trending?
In terms of Kofola CeskoSlovensko's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Kofola CeskoSlovensko to turn into a multi-bagger.
On a related note, Kofola CeskoSlovensko has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From Kofola CeskoSlovensko's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to know some of the risks facing Kofola CeskoSlovensko we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.
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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