What Organización Cultiba. de's (BMV:CULTIBAB) Returns On Capital Can Tell Us

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Organización Cultiba. de (BMV:CULTIBAB), 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 Organización Cultiba. de, this is the formula:

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

0.027 = Mex$515m ÷ (Mex$21b - Mex$1.7b) (Based on the trailing twelve months to September 2020).

So, Organización Cultiba. de has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 11%.

See our latest analysis for Organización Cultiba. de

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're interested in investigating Organización Cultiba. de's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Organización Cultiba. de's ROCE Trending?

We are a bit worried about the trend of returns on capital at Organización Cultiba. de. Unfortunately the returns on capital have diminished from the 5.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Organización Cultiba. de becoming one if things continue as they have.

On a side note, Organización Cultiba. de has done well to pay down its current liabilities to 8.3% 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. 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.

What We Can Learn From Organización Cultiba. de'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. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Organización Cultiba. de does have some risks though, and we've spotted 2 warning signs for Organización Cultiba. de that you might be interested in.

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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