Today we’ll evaluate Prosegur Cash, S.A. (BME:CASH) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Prosegur Cash:
0.24 = €285m ÷ (€1.9b – €669m) (Based on the trailing twelve months to September 2019.)
So, Prosegur Cash has an ROCE of 24%.
Check out our latest analysis for Prosegur Cash
Does Prosegur Cash Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Prosegur Cash’s ROCE is meaningfully better than the 9.5% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Prosegur Cash’s ROCE in absolute terms currently looks quite high.
We can see that, Prosegur Cash currently has an ROCE of 24%, less than the 32% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Prosegur Cash’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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Prosegur Cash.
Do Prosegur Cash’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Prosegur Cash has total assets of €1.9b and current liabilities of €669m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Prosegur Cash has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On Prosegur Cash’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Prosegur Cash 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.