Yahoo Finance Don’t Buy Carlsberg A/S (CPH:CARL B) Until You Understand Its ROCE
Today we'll look at Carlsberg A/S (CPH:CARL B) and reflect on its potential as an investment. 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. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Carlsberg:
0.12 = ø9.9b ÷ (ø125b - ø40b) (Based on the trailing twelve months to June 2019.)
Therefore, Carlsberg has an ROCE of 12%.
See our latest analysis for Carlsberg
Is Carlsberg's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Carlsberg's ROCE is around the 9.9% average reported by the Beverage industry. Regardless of where Carlsberg sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Carlsberg currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 8.4%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Carlsberg's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Carlsberg's 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.
Carlsberg has total assets of ø125b and current liabilities of ø40b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Carlsberg has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Carlsberg's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Carlsberg looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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. Thank you for reading.
