Are Compagnie Plastic Omnium SA’s (EPA:POM) Returns On Investment Worth Your While?
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Today we'll evaluate Compagnie Plastic Omnium SA (EPA:POM) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Compagnie Plastic Omnium:
0.13 = €538m ÷ (€6.8b - €2.7b) (Based on the trailing twelve months to December 2018.)
Therefore, Compagnie Plastic Omnium has an ROCE of 13%.
Check out our latest analysis for Compagnie Plastic Omnium
Does Compagnie Plastic Omnium Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Compagnie Plastic Omnium's ROCE is fairly close to the Auto Components industry average of 12%. Separate from Compagnie Plastic Omnium's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can see in the image below how Compagnie Plastic Omnium's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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 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 Compagnie Plastic Omnium.
Compagnie Plastic Omnium's Current Liabilities And Their Impact On Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Compagnie Plastic Omnium has total liabilities of €2.7b and total assets of €6.8b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. With this level of current liabilities, Compagnie Plastic Omnium's ROCE is boosted somewhat.
Our Take On Compagnie Plastic Omnium's ROCE
Compagnie Plastic Omnium's ROCE does look good, but the level of current liabilities also contribute to that. Compagnie Plastic Omnium 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 Compagnie Plastic Omnium 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.
