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Today we'll evaluate G. Willi-Food International Ltd. (NASDAQ:WILC) 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.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
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.
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 G. Willi-Food International:
0.11 = ₪54m ÷ (₪538m - ₪42m) (Based on the trailing twelve months to March 2020.)
Therefore, G. Willi-Food International has an ROCE of 11%.
Is G. Willi-Food International's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, G. Willi-Food International's ROCE is meaningfully higher than the 7.1% 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 where G. Willi-Food International sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, G. Willi-Food International currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 5.4%. This makes us wonder if the company is improving. The image below shows how G. Willi-Food International's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. How cyclical is G. Willi-Food International? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
G. Willi-Food International's Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.
G. Willi-Food International has total assets of ₪538m and current liabilities of ₪42m. Therefore its current liabilities are equivalent to approximately 7.9% of its total assets. With low current liabilities, G. Willi-Food International's decent ROCE looks that much more respectable.
The Bottom Line On G. Willi-Food International's ROCE
If it is able to keep this up, G. Willi-Food International could be attractive. G. Willi-Food International 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.
I will like G. Willi-Food International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.