Today we are going to look at Piscines Desjoyaux SA (EPA:ALPDX) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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’.
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 Piscines Desjoyaux:
0.19 = €14m ÷ (€103m – €26m) (Based on the trailing twelve months to August 2019.)
Therefore, Piscines Desjoyaux has an ROCE of 19%.
Is Piscines Desjoyaux’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Piscines Desjoyaux’s ROCE appears to be substantially greater than the 11% average in the Leisure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Piscines Desjoyaux’s ROCE is currently very good.
Our data shows that Piscines Desjoyaux currently has an ROCE of 19%, compared to its ROCE of 10% 3 years ago. This makes us think the business might be improving. You can see in the image below how Piscines Desjoyaux’s ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. If Piscines Desjoyaux is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Piscines Desjoyaux’s Current Liabilities Impact Its 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Piscines Desjoyaux has current liabilities of €26m and total assets of €103m. As a result, its current liabilities are equal to approximately 25% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Piscines Desjoyaux’s ROCE
, Piscines Desjoyaux 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.
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 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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