Today we’ll evaluate Resilux NV (EBR:RES) to determine whether it could have potential as an investment idea. 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared 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 measures the amount of pre-tax profits a company can generate from the capital employed in its 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?
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 Resilux:
0.14 = €25m ÷ (€281m – €108m) (Based on the trailing twelve months to December 2019.)
Therefore, Resilux has an ROCE of 14%.
Is Resilux’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Resilux’s ROCE is meaningfully higher than the 11% average in the Packaging industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Resilux compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Resilux’s ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 11%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Resilux’s ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Resilux.
How Resilux’s Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Resilux has current liabilities of €108m and total assets of €281m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. With this level of current liabilities, Resilux’s ROCE is boosted somewhat.
Our Take On Resilux’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. Resilux shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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