Today we are going to look at Revoil S.A. (ATH:REVOIL) 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. Ultimately, it is a useful but imperfect metric. 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 Revoil:
0.096 = €4.4m ÷ (€107m – €61m) (Based on the trailing twelve months to June 2019.)
Therefore, Revoil has an ROCE of 9.6%.
Does Revoil Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Revoil’s ROCE is around the 9.0% average reported by the Oil and Gas industry. Setting aside the industry comparison for now, Revoil’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, Revoil currently has an ROCE of 9.6% compared to its ROCE 3 years ago, which was 6.5%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Revoil’s past growth compares to other companies.
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. Given the industry it operates in, Revoil could be considered cyclical. How cyclical is Revoil? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Revoil’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Revoil has total assets of €107m and current liabilities of €61m. Therefore its current liabilities are equivalent to approximately 57% of its total assets. With a high level of current liabilities, Revoil will experience a boost to its ROCE.
Our Take On Revoil’s ROCE
Even so, the company reports a mediocre ROCE, and there may be better investments out there. 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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