Audax Renovables, S.A. (BME:ADX) Is Employing Capital Very Effectively

Today we'll evaluate Audax Renovables, S.A. (BME:ADX) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Audax Renovables:

0.11 = €42m ÷ (€758m - €367m) (Based on the trailing twelve months to March 2020.)

Therefore, Audax Renovables has an ROCE of 11%.

See our latest analysis for Audax Renovables

Does Audax Renovables Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Audax Renovables's ROCE is meaningfully better than the 5.5% average in the Renewable Energy industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Audax Renovables sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Audax Renovables's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Audax Renovables.

Audax Renovables'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Audax Renovables has total assets of €758m and current liabilities of €367m. Therefore its current liabilities are equivalent to approximately 48% of its total assets. With this level of current liabilities, Audax Renovables's ROCE is boosted somewhat.

What We Can Learn From Audax Renovables's ROCE

Audax Renovables's ROCE does look good, but the level of current liabilities also contribute to that. Audax Renovables 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.