Perseus SA (ATH:PERS): Why Return On Capital Employed Is Important

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Perseus SA (ATH:PERS)’s return fundamentals and stock market performance.

If you purchase a PERS share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Perseus’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Perseus

What is Return on Capital Employed (ROCE)?

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Perseus is good at growing investor capital. Take a look at the formula box beneath:

ROCE Calculation for PERS

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = €3.6m ÷ (€63m – €18m) = 9.6%

As you can see, PERS earned €9.6 from every €100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Perseus is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

ATSE:PERS Last Perf November 23rd 18
ATSE:PERS Last Perf November 23rd 18

What is causing this?

Perseus’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Perseus is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that PERS’s ROCE has deteriorated from 22%, indicating the company’s capital returns have declined. In this time, earnings have fallen from €4.4m to €3.6m and capital employed has increased due to a smaller amount of current liabilities used (meaning the company has used less borrowed money than shareholder capital to produce earnings) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

PERS’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate PERS or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for PERS’s future growth? Take a look at our free research report of analyst consensus for PERS’s outlook.
  2. Valuation: What is PERS worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PERS is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.