Grupo Empresas Navieras S.A. (SNSE:NAVIERA) Is Employing Capital Very Effectively

Today we’ll look at Grupo Empresas Navieras S.A. (SNSE:NAVIERA) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. 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 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’.

So, How Do We Calculate ROCE?

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 Grupo Empresas Navieras:

0.091 = US$81m ÷ (US$1.2b – US$295m) (Based on the trailing twelve months to September 2019.)

Therefore, Grupo Empresas Navieras has an ROCE of 9.1%.

Check out our latest analysis for Grupo Empresas Navieras

Is Grupo Empresas Navieras’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Grupo Empresas Navieras’s ROCE appears to be substantially greater than the 7.4% average in the Shipping industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of how Grupo Empresas Navieras stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

Our data shows that Grupo Empresas Navieras currently has an ROCE of 9.1%, compared to its ROCE of 6.5% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Grupo Empresas Navieras’s ROCE compares to its industry. Click to see more on past growth.

SNSE:NAVIERA Past Revenue and Net Income, March 4th 2020
SNSE:NAVIERA Past Revenue and Net Income, March 4th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Grupo Empresas Navieras? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Grupo Empresas Navieras’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Grupo Empresas Navieras has current liabilities of US$295m and total assets of US$1.2b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

The Bottom Line On Grupo Empresas Navieras’s ROCE

That’s not a bad thing, however Grupo Empresas Navieras has a weak ROCE and may not be an attractive investment. You might be able to find a better investment than Grupo Empresas Navieras. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Grupo Empresas Navieras 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.