Is Coca-Cola FEMSA, S.A.B. de C.V.'s (NYSE:KOF) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) 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.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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. 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'.

So, How Do We Calculate ROCE?

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 Coca-Cola FEMSA. de:

0.12 = Mex$25b ÷ (Mex$258b - Mex$51b) (Based on the trailing twelve months to December 2019.)

Therefore, Coca-Cola FEMSA. de has an ROCE of 12%.

See our latest analysis for Coca-Cola FEMSA. de

Is Coca-Cola FEMSA. de's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Coca-Cola FEMSA. de's ROCE appears to be around the 11% average of the Beverage industry. Independently of how Coca-Cola FEMSA. de compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that Coca-Cola FEMSA. de currently has an ROCE of 12%, compared to its ROCE of 9.7% 3 years ago. This makes us wonder if the company is improving. The image below shows how Coca-Cola FEMSA. de's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:KOF Past Revenue and Net Income March 26th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Coca-Cola FEMSA. de's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Coca-Cola FEMSA. de has current liabilities of Mex$51b and total assets of Mex$258b. Therefore its current liabilities are equivalent to approximately 20% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Coca-Cola FEMSA. de's ROCE

With that in mind, Coca-Cola FEMSA. de's ROCE appears pretty good. There might be better investments than Coca-Cola FEMSA. de out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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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.