Today we are going to look at Installux S.A. (EPA:STAL) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. 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?
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 Installux:
0.099 = €11m ÷ (€148m - €34m) (Based on the trailing twelve months to June 2019.)
Therefore, Installux has an ROCE of 9.9%.
Does Installux Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Installux's ROCE is meaningfully better than the 6.9% average in the Building 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. Separate from Installux's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Installux's current ROCE of 9.9% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Installux's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Installux has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Installux's Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Installux has total assets of €148m and current liabilities of €34m. As a result, its current liabilities are equal to approximately 23% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Installux's ROCE
This is good to see, and with a sound ROCE, Installux could be worth a closer look. There might be better investments than Installux out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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