Why Estoril Sol, SGPS, S.A.’s (ELI:ESON) Return On Capital Employed Is Impressive

Today we are going to look at Estoril Sol, SGPS, S.A. (ELI:ESON) 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, 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.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.

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 Estoril Sol SGPS:

0.16 = €18m ÷ (€150m - €40m) (Based on the trailing twelve months to June 2019.)

Therefore, Estoril Sol SGPS has an ROCE of 16%.

Check out our latest analysis for Estoril Sol SGPS

Does Estoril Sol SGPS Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Estoril Sol SGPS's ROCE appears to be substantially greater than the 7.2% average in the Hospitality industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Estoril Sol SGPS compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, Estoril Sol SGPS currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 13%. This makes us think about whether the company has been reinvesting shrewdly. Take a look at the image below to see how Estoril Sol SGPS's past growth compares to the average in its industry.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. You can check if Estoril Sol SGPS has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Estoril Sol SGPS'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Estoril Sol SGPS has total liabilities of €40m and total assets of €150m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Estoril Sol SGPS's ROCE

With that in mind, Estoril Sol SGPS's ROCE appears pretty good. Estoril Sol SGPS 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.

I will like Estoril Sol SGPS better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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