Today we’ll evaluate Marie Brizard Wine & Spirits SA (EPA:MBWS) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Marie Brizard Wine & Spirits:
0.025 = €11m ÷ (€463m – €197m) (Based on the trailing twelve months to June 2017.)
So, Marie Brizard Wine & Spirits has an ROCE of 2.5%.
Does Marie Brizard Wine & Spirits Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Marie Brizard Wine & Spirits’s ROCE is meaningfully below the Beverage industry average of 4.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Marie Brizard Wine & Spirits compares to its industry, its ROCE in absolute terms is low; not much better than the ~0.8% available in government bonds. There are potentially more appealing investments elsewhere.
As we can see, Marie Brizard Wine & Spirits currently has an ROCE of 2.5% compared to its ROCE 3 years ago, which was 1.8%. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can see analyst predictions in our free report on analyst forecasts for the company.
Do Marie Brizard Wine & Spirits’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Marie Brizard Wine & Spirits has total assets of €463m and current liabilities of €197m. Therefore its current liabilities are equivalent to approximately 43% of its total assets.
The Bottom Line On Marie Brizard Wine & Spirits’s ROCE
In light of sufficient current liabilities to noticeably boost the ROCE, Marie Brizard Wine & Spirits’s ROCE is concerning. There are likely better investments out there. You might be able to find a better buy than Marie Brizard Wine & Spirits. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
Of course Marie Brizard Wine & Spirits may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.