Should You Care About SMCP S.A.’s (EPA:SMCP) Investment Potential?

Today we’ll evaluate SMCP S.A. (EPA:SMCP) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 SMCP:

0.061 = €124m ÷ (€2.3b – €312m) (Based on the trailing twelve months to June 2019.)

Therefore, SMCP has an ROCE of 6.1%.

View our latest analysis for SMCP

Is SMCP’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see SMCP’s ROCE is around the 6.4% average reported by the Specialty Retail industry. Separate from how SMCP stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

SMCP’s current ROCE of 6.1% is lower than its ROCE in the past, which was 9.6%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how SMCP’s past growth compares to other companies.

ENXTPA:SMCP Past Revenue and Net Income, February 20th 2020
ENXTPA:SMCP Past Revenue and Net Income, February 20th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect SMCP’s 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 counter this, investors can check if a company has high current liabilities relative to total assets.

SMCP has current liabilities of €312m and total assets of €2.3b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On SMCP’s ROCE

With that in mind, we’re not overly impressed with SMCP’s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than SMCP. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like SMCP 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 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.