Today we'll evaluate Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Motor Oil (Hellas) Corinth Refineries:
0.18 = €386m ÷ (€3.3b - €1.1b) (Based on the trailing twelve months to June 2019.)
So, Motor Oil (Hellas) Corinth Refineries has an ROCE of 18%.
Does Motor Oil (Hellas) Corinth Refineries Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Motor Oil (Hellas) Corinth Refineries's ROCE is meaningfully higher than the 9.8% average in the Oil and Gas 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. Independently of how Motor Oil (Hellas) Corinth Refineries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Motor Oil (Hellas) Corinth Refineries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Given the industry it operates in, Motor Oil (Hellas) Corinth Refineries could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Motor Oil (Hellas) Corinth Refineries.
Do Motor Oil (Hellas) Corinth Refineries'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 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 €1.1b and total assets of €3.3b. As a result, its current liabilities are equal to approximately 33% of its total assets. Motor Oil (Hellas) Corinth Refineries has a medium level of current liabilities, which would boost the ROCE.
Our Take On Motor Oil (Hellas) Corinth Refineries's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Motor Oil (Hellas) Corinth Refineries 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. Thank you for reading.