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Do You Know About ENGIE SA’s (EPA:ENGI) ROCE?

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Today we'll look at ENGIE SA (EPA:ENGI) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. 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 measures the 'return' (pre-tax profit) a company generates from capital employed 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.

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 ENGIE:

0.046 = €4.7b ÷ (€160b - €58b) (Based on the trailing twelve months to December 2019.)

Therefore, ENGIE has an ROCE of 4.6%.

Check out our latest analysis for ENGIE

Is ENGIE's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that ENGIE's ROCE is fairly close to the Integrated Utilities industry average of 5.0%. Setting aside the industry comparison for now, ENGIE's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

You can see in the image below how ENGIE's ROCE compares to its industry. Click to see more on past growth.

ENXTPA:ENGI Past Revenue and Net Income, March 17th 2020
ENXTPA:ENGI Past Revenue and Net Income, March 17th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for ENGIE.

ENGIE'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.

ENGIE has current liabilities of €58b and total assets of €160b. As a result, its current liabilities are equal to approximately 36% of its total assets. ENGIE has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From ENGIE's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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

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.

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. Thank you for reading.