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Today we are going to look at LVMH Moët Hennessy – Louis Vuitton, Société Européenne (EPA:MC) to see whether it might be an attractive investment prospect. 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 LVMH Moët Hennessy – Louis Vuitton Société Européenne:
0.17 = €10.0b ÷ (€74b – €17b) (Based on the trailing twelve months to December 2018.)
So, LVMH Moët Hennessy – Louis Vuitton Société Européenne has an ROCE of 17%.
Does LVMH Moët Hennessy – Louis Vuitton Société Européenne Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that LVMH Moët Hennessy – Louis Vuitton Société Européenne’s ROCE is meaningfully better than the 11% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from LVMH Moët Hennessy – Louis Vuitton Société Européenne’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for LVMH Moët Hennessy – Louis Vuitton Société Européenne.
LVMH Moët Hennessy – Louis Vuitton Société Européenne’s Current Liabilities And Their Impact On Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
LVMH Moët Hennessy – Louis Vuitton Société Européenne has total assets of €74b and current liabilities of €17b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From LVMH Moët Hennessy – Louis Vuitton Société Européenne’s ROCE
With that in mind, LVMH Moët Hennessy – Louis Vuitton Société Européenne’s ROCE appears pretty good. LVMH Moët Hennessy – Louis Vuitton Société Européenne 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.
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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 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. Thank you for reading.