Are Grupo Empresarial San José, S.A.’s (BME:GSJ) High Returns Really That Great?

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Today we'll look at Grupo Empresarial San José, S.A. (BME:GSJ) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 Grupo Empresarial San José:

0.087 = €27m ÷ (€996m - €683m) (Based on the trailing twelve months to December 2018.)

So, Grupo Empresarial San José has an ROCE of 8.7%.

View our latest analysis for Grupo Empresarial San José

Does Grupo Empresarial San José Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Grupo Empresarial San José's ROCE is meaningfully higher than the 6.2% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Grupo Empresarial San José's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that Grupo Empresarial San José currently has an ROCE of 8.7%, compared to its ROCE of 5.8% 3 years ago. This makes us wonder if the company is improving.

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 Empresarial San José? You can see for yourself by looking at this freegraph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Grupo Empresarial San José's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Grupo Empresarial San José has total assets of €996m and current liabilities of €683m. Therefore its current liabilities are equivalent to approximately 69% of its total assets. Grupo Empresarial San José's current liabilities are fairly high, making its ROCE look better than otherwise.

Our Take On Grupo Empresarial San José's ROCE

Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

If you are like me, then you will not want to miss this freelist of growing companies that insiders are buying.

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.