Today we'll look at Groupe Guillin S.A. (EPA:ALGIL) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Groupe Guillin:
0.14 = €68m ÷ (€636m - €163m) (Based on the trailing twelve months to December 2019.)
Therefore, Groupe Guillin has an ROCE of 14%.
Is Groupe Guillin's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Groupe Guillin's ROCE is around the 14% average reported by the Packaging industry. Regardless of where Groupe Guillin sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Groupe Guillin's current ROCE of 14% is lower than 3 years ago, when the company reported a 22% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Groupe Guillin's ROCE compares to its industry. Click to see more on past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Groupe Guillin.
Groupe Guillin's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Groupe Guillin has total assets of €636m and current liabilities of €163m. As a result, its current liabilities are equal to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Groupe Guillin's ROCE
Overall, Groupe Guillin has a decent ROCE and could be worthy of further research. Groupe Guillin 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.
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