Yahoo Finance Do You Know About Constellation Brands, Inc.’s (NYSE:STZ) ROCE?
Today we are going to look at Constellation Brands, Inc. (NYSE:STZ) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Constellation Brands:
0.10 = US$2.7b ÷ (US$29b - US$2.9b) (Based on the trailing twelve months to May 2019.)
Therefore, Constellation Brands has an ROCE of 10%.
Check out our latest analysis for Constellation Brands
Is Constellation Brands's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Constellation Brands's ROCE appears to be around the 10% average of the Beverage industry. Separate from how Constellation Brands stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
You can see in the image below how Constellation Brands's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.
Do Constellation Brands's Current Liabilities Skew 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Constellation Brands has total liabilities of US$2.9b and total assets of US$29b. As a result, its current liabilities are equal to approximately 10% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On Constellation Brands's ROCE
That said, Constellation Brands's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Constellation Brands. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
