Today we are going to look at CTT - Correios De Portugal, S.A. (ELI:CTT) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.
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 CTT - Correios De Portugal:
0.10 = €65m ÷ (€2.4b - €1.7b) (Based on the trailing twelve months to September 2019.)
Therefore, CTT - Correios De Portugal has an ROCE of 10%.
Does CTT - Correios De Portugal Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see CTT - Correios De Portugal's ROCE is around the 10% average reported by the Logistics industry. Regardless of where CTT - Correios De Portugal sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, CTT - Correios De Portugal currently has an ROCE of 10%, less than the 16% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how CTT - Correios De Portugal's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CTT - Correios De Portugal.
What Are Current Liabilities, And How Do They Affect CTT - Correios De Portugal'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
CTT - Correios De Portugal has total assets of €2.4b and current liabilities of €1.7b. As a result, its current liabilities are equal to approximately 73% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
The Bottom Line On CTT - Correios De Portugal's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than CTT - Correios De Portugal out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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