Today we’ll look at Gérard Perrier Industrie S.A. (EPA:PERR) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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 Gérard Perrier Industrie:
0.20 = €19m ÷ (€159m – €66m) (Based on the trailing twelve months to June 2019.)
Therefore, Gérard Perrier Industrie has an ROCE of 20%.
Does Gérard Perrier Industrie Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Gérard Perrier Industrie’s ROCE is meaningfully better than the 12% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Gérard Perrier Industrie’s ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how Gérard Perrier Industrie’s past growth compares to other companies.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Gérard Perrier Industrie.
Do Gérard Perrier Industrie’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Gérard Perrier Industrie has total liabilities of €66m and total assets of €159m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. A medium level of current liabilities boosts Gérard Perrier Industrie’s ROCE somewhat.
The Bottom Line On Gérard Perrier Industrie’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Gérard Perrier Industrie shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Gérard Perrier Industrie better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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