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Is Cátenon, S.A.’s (BME:COM) 17% Return On Capital Employed Good News?

Simply Wall St

Today we'll look at Cátenon, S.A. (BME:COM) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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. 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?

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 Cátenon:

0.17 = €586k ÷ (€6.8m - €3.4m) (Based on the trailing twelve months to June 2018.)

Therefore, Cátenon has an ROCE of 17%.

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Does Cátenon Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Cátenon's ROCE appears to be around the 16% average of the Professional Services industry. Separate from Cátenon's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Cátenon currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 12%. This makes us wonder if the company is improving.

BME:COM Past Revenue and Net Income, May 22nd 2019

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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cátenon.

What Are Current Liabilities, And How Do They Affect Cátenon's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Cátenon has total assets of €6.8m and current liabilities of €3.4m. As a result, its current liabilities are equal to approximately 50% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.

The Bottom Line On Cátenon's ROCE

This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Cátenon 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 Cátenon better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.