Today we are going to look at Elinoil Hellenic Petroleum Company S.A. (ATH:ELIN) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Elinoil Hellenic Petroleum:
0.15 = €9.6m ÷ (€197m - €135m) (Based on the trailing twelve months to June 2019.)
So, Elinoil Hellenic Petroleum has an ROCE of 15%.
Is Elinoil Hellenic Petroleum's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Elinoil Hellenic Petroleum's ROCE appears to be substantially greater than the 7.6% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Elinoil Hellenic Petroleum sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Elinoil Hellenic Petroleum's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. Given the industry it operates in, Elinoil Hellenic Petroleum could be considered cyclical. How cyclical is Elinoil Hellenic Petroleum? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Elinoil Hellenic Petroleum's Current Liabilities Impact 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.
Elinoil Hellenic Petroleum has total assets of €197m and current liabilities of €135m. Therefore its current liabilities are equivalent to approximately 68% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
The Bottom Line On Elinoil Hellenic Petroleum's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. Elinoil Hellenic Petroleum looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.