U.S. Markets open in 3 hrs 1 min

Are Corticeira Amorim, S.G.P.S., S.A.’s (ELI:COR) High Returns Really That Great?

Simply Wall St

Today we'll look at Corticeira Amorim, S.G.P.S., S.A. (ELI:COR) 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.

Firstly, we'll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Corticeira Amorim S.G.P.S:

0.13 = €87m ÷ (€1.0b - €381m) (Based on the trailing twelve months to September 2019.)

So, Corticeira Amorim S.G.P.S has an ROCE of 13%.

View our latest analysis for Corticeira Amorim S.G.P.S

Does Corticeira Amorim S.G.P.S Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Corticeira Amorim S.G.P.S's ROCE is meaningfully better than the 11% average in the Packaging 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. Independently of how Corticeira Amorim S.G.P.S compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, Corticeira Amorim S.G.P.S currently has an ROCE of 13%, less than the 19% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Corticeira Amorim S.G.P.S's ROCE compares to its industry. Click to see more on past growth.

ENXTLS:COR Past Revenue and Net Income, January 24th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Corticeira Amorim S.G.P.S.

How Corticeira Amorim S.G.P.S's Current Liabilities Impact Its 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.

Corticeira Amorim S.G.P.S has total liabilities of €381m and total assets of €1.0b. As a result, its current liabilities are equal to approximately 37% of its total assets. Corticeira Amorim S.G.P.S has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Corticeira Amorim S.G.P.S's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Corticeira Amorim S.G.P.S 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.

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.

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. Thank you for reading.