Why You Should Like Christian Dior SE’s (EPA:CDI) ROCE

Today we'll evaluate Christian Dior SE (EPA:CDI) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. 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.

What is Return On Capital Employed (ROCE)?

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'.

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 Christian Dior:

0.15 = €11b ÷ (€93b - €21b) (Based on the trailing twelve months to June 2019.)

So, Christian Dior has an ROCE of 15%.

View our latest analysis for Christian Dior

Is Christian Dior's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Christian Dior's ROCE is meaningfully higher than the 9.4% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Christian Dior compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

You can click on the image below to see (in greater detail) how Christian Dior's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Christian Dior.

What Are Current Liabilities, And How Do They Affect Christian Dior's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Christian Dior has total assets of €93b and current liabilities of €21b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Christian Dior's ROCE

With that in mind, Christian Dior's ROCE appears pretty good. There might be better investments than Christian Dior out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Christian Dior better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.