Today we’ll look at Etn. Fr. Colruyt NV (EBR:COLR) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, 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.
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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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’.
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 Etn. Fr. Colruyt:
0.23 = €491m ÷ (€4.1b – €1.9b) (Based on the trailing twelve months to September 2018.)
So, Etn. Fr. Colruyt has an ROCE of 23%.
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Is Etn. Fr. Colruyt’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Etn. Fr. Colruyt’s ROCE appears to be substantially greater than the 10% average in the Consumer Retailing 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. Regardless of the industry comparison, in absolute terms, Etn. Fr. Colruyt’s ROCE currently appears to be excellent.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Etn. Fr. Colruyt.
Etn. Fr. Colruyt’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Etn. Fr. Colruyt has total assets of €4.1b and current liabilities of €1.9b. As a result, its current liabilities are equal to approximately 46% of its total assets. A medium level of current liabilities boosts Etn. Fr. Colruyt’s ROCE somewhat.
Our Take On Etn. Fr. Colruyt’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than Etn. Fr. Colruyt. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.