Today we'll evaluate Fountaine Pajot SA (EPA:ALFPC) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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'.
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 Fountaine Pajot:
0.22 = €21m ÷ (€182m - €88m) (Based on the trailing twelve months to August 2019.)
Therefore, Fountaine Pajot has an ROCE of 22%.
Is Fountaine Pajot's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Fountaine Pajot's ROCE is meaningfully higher than the 11% average in the Leisure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Fountaine Pajot's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Fountaine Pajot's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Fountaine Pajot.
How Fountaine Pajot's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Fountaine Pajot has current liabilities of €88m and total assets of €182m. As a result, its current liabilities are equal to approximately 49% of its total assets. Fountaine Pajot's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From Fountaine Pajot's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Fountaine Pajot 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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