Today we'll look at Befesa S.A. (ETR:BFSA) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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?
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 Befesa:
0.15 = €136m ÷ (€1.1b - €189m) (Based on the trailing twelve months to June 2019.)
So, Befesa has an ROCE of 15%.
Does Befesa Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Befesa's ROCE is meaningfully better than the 9.7% average in the Commercial Services 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. Separate from Befesa's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Befesa currently has an ROCE of 15%, compared to its ROCE of 11% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Befesa's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Befesa's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Befesa has total liabilities of €189m and total assets of €1.1b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Befesa's ROCE
This is good to see, and with a sound ROCE, Befesa could be worth a closer look. Befesa looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Befesa better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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.