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How Good Is Flexopack Société Anonyme Commercial and Industrial Plastics Company (ATH:FLEXO) At Creating Shareholder Value?

Simply Wall St

Today we'll look at Flexopack Société Anonyme Commercial and Industrial Plastics Company (ATH:FLEXO) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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. Ultimately, it is a useful but imperfect metric. 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 Flexopack Société Anonyme Commercial and Industrial Plastics:

0.10 = €9.3m ÷ (€116m - €26m) (Based on the trailing twelve months to June 2019.)

Therefore, Flexopack Société Anonyme Commercial and Industrial Plastics has an ROCE of 10%.

Check out our latest analysis for Flexopack Société Anonyme Commercial and Industrial Plastics

Is Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE appears to be around the 11% average of the Packaging industry. Setting aside the industry comparison for now, Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

You can click on the image below to see (in greater detail) how Flexopack Société Anonyme Commercial and Industrial Plastics's past growth compares to other companies.

ATSE:FLEXO Past Revenue and Net Income, November 9th 2019

It is important to remember that ROCE shows past performance, and is 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. How cyclical is Flexopack Société Anonyme Commercial and Industrial Plastics? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Flexopack Société Anonyme Commercial and Industrial Plastics'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Flexopack Société Anonyme Commercial and Industrial Plastics has total assets of €116m and current liabilities of €26m. As a result, its current liabilities are equal to approximately 23% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE

That said, Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.