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What Can We Make Of Envea Société anonyme’s (EPA:ALTEV) High Return On Capital?

Simply Wall St

Today we'll evaluate Envea Société anonyme (EPA:ALTEV) to determine whether it could have potential as an investment idea. 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, 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. 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 Envea Société anonyme:

0.21 = €16m ÷ (€98m - €22m) (Based on the trailing twelve months to June 2019.)

Therefore, Envea Société anonyme has an ROCE of 21%.

Check out our latest analysis for Envea Société anonyme

Does Envea Société anonyme Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Envea Société anonyme's ROCE appears to be substantially greater than the 7.6% average in the Electronic industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Envea Société anonyme's ROCE in absolute terms currently looks quite high.

We can see that, Envea Société anonyme currently has an ROCE of 21% compared to its ROCE 3 years ago, which was 12%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Envea Société anonyme's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTPA:ALTEV Past Revenue and Net Income, February 2nd 2020

When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Envea Société anonyme's Current Liabilities Impact Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Envea Société anonyme has current liabilities of €22m and total assets of €98m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

The Bottom Line On Envea Société anonyme's ROCE

This is good to see, and with such a high ROCE, Envea Société anonyme may be worth a closer look. There might be better investments than Envea Société anonyme 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.