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How Good Is Schneider Electric S.E. (EPA:SU) At Creating Shareholder Value?

Wade Goff

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Today we’ll evaluate Schneider Electric S.E. (EPA:SU) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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’.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Schneider Electric:

0.11 = €3.5b ÷ (€43b – €12b) (Based on the trailing twelve months to June 2018.)

Therefore, Schneider Electric has an ROCE of 11%.

See our latest analysis for Schneider Electric

Does Schneider Electric Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Schneider Electric’s ROCE is around the 11% average reported by the Electrical industry. Separate from Schneider Electric’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

ENXTPA:SU Last Perf February 4th 19

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Schneider Electric.

Do Schneider Electric’s Current Liabilities Skew 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. 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.

Schneider Electric has total assets of €43b and current liabilities of €12b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Schneider Electric’s ROCE

With that in mind, Schneider Electric’s ROCE appears pretty good. Of course you might be able to find a better stock than Schneider Electric. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Schneider Electric better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.