Evaluating bpost SA/NV’s (EBR:BPOST) Investments In Its Business

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Today we are going to look at bpost SA/NV (EBR:BPOST) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. Ultimately, it is a useful but imperfect metric. 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'.

So, How Do We Calculate ROCE?

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 bpost:

0.16 = €464m ÷ (€3.1b - €1.0b) (Based on the trailing twelve months to September 2018.)

Therefore, bpost has an ROCE of 16%.

See our latest analysis for bpost

Does bpost Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, bpost's ROCE appears to be around the 15% average of the Logistics industry. Independently of how bpost compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

bpost's current ROCE of 16% is lower than its ROCE in the past, which was 33%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

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. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for bpost.

Do bpost's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

bpost has total assets of €3.1b and current liabilities of €1.0b. As a result, its current liabilities are equal to approximately 33% of its total assets. bpost has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On bpost's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Of course you might be able to find a better stock than bpost. So you may wish to see this freecollection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.