Should You Care About Cenergy Holdings SA’s (EBR:CENER) Investment Potential?

Today we are going to look at Cenergy Holdings SA (EBR:CENER) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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. 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 Cenergy Holdings:

0.13 = €58m ÷ (€1.0b - €582m) (Based on the trailing twelve months to December 2019.)

So, Cenergy Holdings has an ROCE of 13%.

See our latest analysis for Cenergy Holdings

Does Cenergy Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Cenergy Holdings's ROCE appears to be around the 11% average of the Electrical industry. Independently of how Cenergy Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that Cenergy Holdings currently has an ROCE of 13%, compared to its ROCE of 7.6% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Cenergy Holdings'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. You can check if Cenergy Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Cenergy Holdings'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. 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.

Cenergy Holdings has total assets of €1.0b and current liabilities of €582m. Therefore its current liabilities are equivalent to approximately 56% of its total assets. Cenergy Holdings has a relatively high level of current liabilities, boosting its ROCE meaningfully.

What We Can Learn From Cenergy Holdings's ROCE

This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. There might be better investments than Cenergy Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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.
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