Today we’ll evaluate Vente-Unique.com SA (EPA:ALVU) to determine whether it could have potential as an investment idea. 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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 Vente-Unique.com:
0.31 = €4.7m ÷ (€36m – €21m) (Based on the trailing twelve months to September 2018.)
So, Vente-Unique.com has an ROCE of 31%.
Is Vente-Unique.com’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Vente-Unique.com’s ROCE appears to be substantially greater than the 12% average in the Online Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Vente-Unique.com’s ROCE is currently very good.
Vente-Unique.com’s current ROCE of 31% is lower than 3 years ago, when the company reported a 43% ROCE. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Vente-Unique.com.
What Are Current Liabilities, And How Do They Affect Vente-Unique.com’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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Vente-Unique.com has total liabilities of €21m and total assets of €36m. Therefore its current liabilities are equivalent to approximately 58% of its total assets. While a high level of current liabilities boosts its ROCE, Vente-Unique.com’s returns are still very good.
The Bottom Line On Vente-Unique.com’s ROCE
So we would be interested in doing more research here — there may be an opportunity! Of course you might be able to find a better stock than Vente-Unique.com. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Vente-Unique.com 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 firstname.lastname@example.org. 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.