Today we are going to look at Keurig Dr Pepper Inc. (NYSE:KDP) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Keurig Dr Pepper:
0.048 = US$2.0b ÷ (US$49b – US$6.7b) (Based on the trailing twelve months to March 2019.)
So, Keurig Dr Pepper has an ROCE of 4.8%.
Is Keurig Dr Pepper’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Keurig Dr Pepper’s ROCE is meaningfully below the Beverage industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Keurig Dr Pepper compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.
Keurig Dr Pepper’s current ROCE of 4.8% is lower than 3 years ago, when the company reported a 10% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Keurig Dr Pepper.
What Are Current Liabilities, And How Do They Affect Keurig Dr Pepper’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Keurig Dr Pepper has total liabilities of US$6.7b and total assets of US$49b. As a result, its current liabilities are equal to approximately 14% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
What We Can Learn From Keurig Dr Pepper’s ROCE
Keurig Dr Pepper has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Keurig Dr Pepper better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.