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Today we are going to look at PRO-LOG Spólka Akcyjna (WSE:PRL) 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 up, we’ll look at what ROCE is and how we calculate it. 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.
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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
So, How Do We Calculate ROCE?
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 PRO-LOG Spólka Akcyjna:
0.44 = zł3.6m ÷ (zł11m – zł3.2m) (Based on the trailing twelve months to December 2018.)
So, PRO-LOG Spólka Akcyjna has an ROCE of 44%.
Is PRO-LOG Spólka Akcyjna’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. PRO-LOG Spólka Akcyjna’s ROCE appears to be substantially greater than the 13% average in the Logistics industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, PRO-LOG Spólka Akcyjna’s ROCE in absolute terms currently looks quite high.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If PRO-LOG Spólka Akcyjna is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do PRO-LOG Spólka Akcyjna’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
PRO-LOG Spólka Akcyjna has total liabilities of zł3.2m and total assets of zł11m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
The Bottom Line On PRO-LOG Spólka Akcyjna’s ROCE
Low current liabilities and high ROCE is a good combination, making PRO-LOG Spólka Akcyjna look quite interesting. PRO-LOG Spólka Akcyjna shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 email@example.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.