Today we’ll look at Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Motor Oil (Hellas) Corinth Refineries:
0.20 = €398m ÷ (€2.8b – €834m) (Based on the trailing twelve months to December 2018.)
So, Motor Oil (Hellas) Corinth Refineries has an ROCE of 20%.
Does Motor Oil (Hellas) Corinth Refineries Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Motor Oil (Hellas) Corinth Refineries’s ROCE appears to be substantially greater than the 8.9% 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 Motor Oil (Hellas) Corinth Refineries sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. We note Motor Oil (Hellas) Corinth Refineries could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Motor Oil (Hellas) Corinth Refineries’s Current Liabilities Impact 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 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.
Motor Oil (Hellas) Corinth Refineries has total liabilities of €834m and total assets of €2.8b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Motor Oil (Hellas) Corinth Refineries’s ROCE
This is good to see, and with a sound ROCE, Motor Oil (Hellas) Corinth Refineries could be worth a closer look. You might be able to find a better buy than Motor Oil (Hellas) Corinth Refineries. 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).
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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 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.