U.S. Markets closed

Is Bureau Veritas SA's (EPA:BVI) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at Bureau Veritas SA (EPA:BVI) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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. In general, businesses with a higher ROCE are usually better quality. 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 Bureau Veritas:

0.15 = €667m ÷ (€6.3b - €1.7b) (Based on the trailing twelve months to June 2019.)

So, Bureau Veritas has an ROCE of 15%.

See our latest analysis for Bureau Veritas

Is Bureau Veritas's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Bureau Veritas's ROCE appears to be around the 15% average of the Professional Services industry. Regardless of where Bureau Veritas sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Bureau Veritas's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTPA:BVI Past Revenue and Net Income, September 17th 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bureau Veritas.

What Are Current Liabilities, And How Do They Affect Bureau Veritas's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Bureau Veritas has total liabilities of €1.7b and total assets of €6.3b. 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 Bureau Veritas's ROCE

Overall, Bureau Veritas has a decent ROCE and could be worthy of further research. Bureau Veritas 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.