Today we are going to look at CCC S.A. (WSE:CCC) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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?
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 CCC:
0.035 = zł137m ÷ (zł7.4b – zł3.5b) (Based on the trailing twelve months to September 2019.)
Therefore, CCC has an ROCE of 3.5%.
Is CCC’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see CCC’s ROCE is meaningfully below the Luxury industry average of 6.9%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how CCC stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
CCC’s current ROCE of 3.5% is lower than 3 years ago, when the company reported a 19% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how CCC’s ROCE compares to its industry. Click to see more on past growth.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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.
Do CCC’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
CCC has total assets of zł7.4b and current liabilities of zł3.5b. Therefore its current liabilities are equivalent to approximately 47% of its total assets. With a medium level of current liabilities boosting the ROCE a little, CCC’s low ROCE is unappealing.
Our Take On CCC’s ROCE
So researching other companies may be a better use of your time. 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.
I will like CCC better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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