Today we'll look at bpost SA/NV (EBR:BPOST) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.'
So, How Do We Calculate ROCE?
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 bpost:
0.15 = €346m ÷ (€3.7b - €1.4b) (Based on the trailing twelve months to March 2019.)
Therefore, bpost has an ROCE of 15%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Is bpost's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, bpost's ROCE is meaningfully higher than the 11% average in the Logistics industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where bpost sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
bpost's current ROCE of 15% is lower than its ROCE in the past, which was 39%, 3 years ago. This makes us wonder if the business is facing new challenges.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for bpost.
What Are Current Liabilities, And How Do They Affect bpost's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
bpost has total liabilities of €1.4b and total assets of €3.7b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. bpost has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On bpost's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. bpost 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 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.