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Coca-Cola Amatil Limited (ASX:CCL) Earns Among The Best Returns In Its Industry

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Today we'll look at Coca-Cola Amatil Limited (ASX:CCL) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Coca-Cola Amatil:

0.15 = AU$672m ÷ (AU$6.2b - AU$1.6b) (Based on the trailing twelve months to December 2018.)

So, Coca-Cola Amatil has an ROCE of 15%.

Check out our latest analysis for Coca-Cola Amatil

Does Coca-Cola Amatil Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Coca-Cola Amatil's ROCE appears to be substantially greater than the 11% average in the Beverage industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Coca-Cola Amatil compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

ASX:CCL Past Revenue and Net Income, May 29th 2019
ASX:CCL Past Revenue and Net Income, May 29th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Coca-Cola Amatil.

How Coca-Cola Amatil's Current Liabilities Impact Its 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Coca-Cola Amatil has total assets of AU$6.2b and current liabilities of AU$1.6b. As a result, its current liabilities are equal to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Coca-Cola Amatil's ROCE

This is good to see, and with a sound ROCE, Coca-Cola Amatil could be worth a closer look. Coca-Cola Amatil 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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 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. Thank you for reading.