Today we’ll evaluate Geke S.A. (ATH:PRESD) 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. 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 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. In the end, ROCE is a valuable metric that has its flaws. 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 Geke:
0.057 = €3.6m ÷ (€66m – €2.6m) (Based on the trailing twelve months to June 2018.)
So, Geke has an ROCE of 5.7%.
Does Geke Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Geke’s ROCE appears meaningfully below the 8.9% average reported by the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Geke compares to its industry, its ROCE in absolute terms is low; not much better than the ~4.3% available in government bonds. It is likely that there are more attractive prospects out there.
Our data shows that Geke currently has an ROCE of 5.7%, compared to its ROCE of 3.5% 3 years ago. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Geke? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Geke’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Geke has total liabilities of €2.6m and total assets of €66m. As a result, its current liabilities are equal to approximately 3.9% of its total assets.
The Bottom Line On Geke’s ROCE
Geke has a low level of current liabilities, which have a negligible impact on its already low ROCE. Nonetheless, there may be better places to invest your capital. Of course you might be able to find a better stock than Geke. So you may wish to see this free collection of other companies that have grown earnings strongly.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
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 firstname.lastname@example.org.