How Do Energoinstal S.A.’s (WSE:ENI) Returns On Capital Compare To Peers?

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Today we are going to look at Energoinstal S.A. (WSE:ENI) to see whether it might be an attractive investment prospect. 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it 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?

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 Energoinstal:

0.01 = zł682k ÷ (zł96m – zł30m) (Based on the trailing twelve months to March 2019.)

So, Energoinstal has an ROCE of 1.0%.

View our latest analysis for Energoinstal

Does Energoinstal Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Energoinstal’s ROCE appears to be significantly below the 8.6% average in the Machinery industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Energoinstal stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Energoinstal’s current ROCE of 1.0% is lower than its ROCE in the past, which was 13%, 3 years ago. So investors might consider if it has had issues recently.

WSE:ENI Past Revenue and Net Income, July 11th 2019
WSE:ENI Past Revenue and Net Income, July 11th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Energoinstal has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Energoinstal’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Energoinstal has total assets of zł96m and current liabilities of zł30m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Energoinstal’s ROCE is concerning.

Our Take On Energoinstal’s ROCE

This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Energoinstal. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 editorial-team@simplywallst.com. 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.