To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into C&C Group (LON:CCR), we weren't too upbeat about how things were going.
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. Analysts use this formula to calculate it for C&C Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = €44m ÷ (€1.5b - €549m) (Based on the trailing twelve months to August 2020).
Thus, C&C Group has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 12%.
See our latest analysis for C&C Group
In the above chart we have measured C&C Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering C&C Group here for free.
The Trend Of ROCE
There is reason to be cautious about C&C Group, given the returns are trending downwards. About five years ago, returns on capital were 8.7%, however they're now substantially lower than that as we saw above. 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 C&C Group to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.5%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On C&C Group'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. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 48% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing to note, we've identified 1 warning sign with C&C Group and understanding it should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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About LSE:CCR
C&C Group
Manufactures, markets, and distributes beer, cider, wine, spirits, and soft drinks in the Republic of Ireland, Great Britain, and internationally.
Flawless balance sheet with reasonable growth potential.