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Is DPA Group N.V.'s (AMS:DPA) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at DPA Group N.V. (AMS:DPA) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for DPA Group:

0.13 = €9.9m ÷ (€128m - €52m) (Based on the trailing twelve months to June 2019.)

Therefore, DPA Group has an ROCE of 13%.

See our latest analysis for DPA Group

Is DPA Group's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that DPA Group's ROCE is fairly close to the Professional Services industry average of 13%. Separate from DPA Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

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

ENXTAM:DPA Past Revenue and Net Income, September 21st 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for DPA Group.

DPA Group'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

DPA Group has total liabilities of €52m and total assets of €128m. As a result, its current liabilities are equal to approximately 40% of its total assets. DPA Group has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On DPA Group's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. DPA Group 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.

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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.