Are Cogelec SA’s (EPA:COGEC) High Returns Really That Great?

Today we’ll evaluate Cogelec SA (EPA:COGEC) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.’

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 Cogelec:

0.10 = €5.4m ÷ (€54m – €11m) (Based on the trailing twelve months to June 2018.)

Therefore, Cogelec has an ROCE of 10%.

Check out our latest analysis for Cogelec

Is Cogelec’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Cogelec’s ROCE is meaningfully better than the 6.9% average in the Communications industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Cogelec compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

ENXTPA:COGEC Last Perf January 25th 19
ENXTPA:COGEC Last Perf January 25th 19

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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Cogelec’s Current Liabilities And Their Impact On 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 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.

Cogelec has total liabilities of €11m and total assets of €54m. As a result, its current liabilities are equal to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Cogelec’s ROCE

With that in mind, Cogelec’s ROCE appears pretty good. You might be able to find a better buy than Cogelec. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.