Returns On Capital At Kofola CeskoSlovensko (SEP:KOFOL) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Kofola CeskoSlovensko (SEP:KOFOL) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kofola CeskoSlovensko is:

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

0.093 = Kč550m ÷ (Kč8.2b - Kč2.3b) (Based on the trailing twelve months to September 2020).

Therefore, Kofola CeskoSlovensko has an ROCE of 9.3%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.

Check out our latest analysis for Kofola CeskoSlovensko

Above you can see how the current ROCE for Kofola CeskoSlovensko compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Kofola CeskoSlovensko's ROCE Trending?

In terms of Kofola CeskoSlovensko's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.3% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Kofola CeskoSlovensko has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Kofola CeskoSlovensko's ROCE

In summary, Kofola CeskoSlovensko is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Kofola CeskoSlovensko does have some risks though, and we've spotted 1 warning sign for Kofola CeskoSlovensko that you might be interested in.

While Kofola CeskoSlovensko 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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