Today we’ll evaluate Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) to determine whether it could have potential as an investment idea. 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. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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 Motor Oil (Hellas) Corinth Refineries:
0.28 = €560m ÷ (€3.1b – €1.0b) (Based on the trailing twelve months to September 2018.)
Therefore, Motor Oil (Hellas) Corinth Refineries has an ROCE of 28%.
Is Motor Oil (Hellas) Corinth Refineries’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Motor Oil (Hellas) Corinth Refineries’s ROCE is meaningfully higher than the 9.5% average in the Oil and Gas industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Motor Oil (Hellas) Corinth Refineries’s ROCE in absolute terms currently looks quite high.
Our data shows that Motor Oil (Hellas) Corinth Refineries currently has an ROCE of 28%, compared to its ROCE of 15% 3 years ago. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Given the industry it operates in, Motor Oil (Hellas) Corinth Refineries could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Motor Oil (Hellas) Corinth Refineries.
Do Motor Oil (Hellas) Corinth Refineries’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 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.
Motor Oil (Hellas) Corinth Refineries has total liabilities of €1.0b and total assets of €3.1b. As a result, its current liabilities are equal to approximately 33% of its total assets. A medium level of current liabilities boosts Motor Oil (Hellas) Corinth Refineries’s ROCE somewhat.
The Bottom Line On Motor Oil (Hellas) Corinth Refineries’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. But note: Motor Oil (Hellas) Corinth Refineries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Motor Oil (Hellas) Corinth Refineries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 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. Thank you for reading.