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Evaluating Sogeclair SA’s (EPA:SOG) Investments In Its Business

Veer Mallick

Today we are going to look at Sogeclair SA (EPA:SOG) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.’

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 Sogeclair:

0.11 = €9.8m ÷ (€139m – €59m) (Based on the trailing twelve months to June 2018.)

Therefore, Sogeclair has an ROCE of 11%.

See our latest analysis for Sogeclair

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Does Sogeclair Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Sogeclair’s ROCE appears to be around the 10% average of the Aerospace & Defense industry. Regardless of where Sogeclair sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

ENXTPA:SOG Last Perf January 29th 19

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Sogeclair.

Sogeclair’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Sogeclair has total assets of €139m and current liabilities of €59m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Sogeclair has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Sogeclair’s ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 editorial-team@simplywallst.com.