Maple Leaf Foods Inc.’s (TSE:MFI) Investment Returns Are Lagging Its Industry

Simply Wall St
·4-min read

Today we'll look at Maple Leaf Foods Inc. (TSE:MFI) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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'.

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 Maple Leaf Foods:

0.042 = CA$126m ÷ (CA$3.5b - CA$535m) (Based on the trailing twelve months to December 2019.)

So, Maple Leaf Foods has an ROCE of 4.2%.

Check out our latest analysis for Maple Leaf Foods

Is Maple Leaf Foods's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Maple Leaf Foods's ROCE is meaningfully below the Food industry average of 7.9%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Maple Leaf Foods's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Maple Leaf Foods's current ROCE of 4.2% is lower than 3 years ago, when the company reported a 12% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Maple Leaf Foods's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSX:MFI Past Revenue and Net Income April 1st 2020
TSX:MFI Past Revenue and Net Income April 1st 2020

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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Maple Leaf Foods's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Maple Leaf Foods has current liabilities of CA$535m and total assets of CA$3.5b. Therefore its current liabilities are equivalent to approximately 15% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On Maple Leaf Foods's ROCE

While that is good to see, Maple Leaf Foods has a low ROCE and does not look attractive in this analysis. 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.

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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.