Today we'll look at Prosegur Compañía de Seguridad, S.A. (BME:PSG) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Prosegur Compañía de Seguridad:
0.11 = €312m ÷ (€4.1b - €1.2b) (Based on the trailing twelve months to September 2019.)
Therefore, Prosegur Compañía de Seguridad has an ROCE of 11%.
Is Prosegur Compañía de Seguridad's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Prosegur Compañía de Seguridad's ROCE is around the 9.6% average reported by the Commercial Services industry. Regardless of where Prosegur Compañía de Seguridad sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Prosegur Compañía de Seguridad's current ROCE of 11% is lower than 3 years ago, when the company reported a 19% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Prosegur Compañía de Seguridad's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Prosegur Compañía de Seguridad.
What Are Current Liabilities, And How Do They Affect Prosegur Compañía de Seguridad's 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.
Prosegur Compañía de Seguridad has current liabilities of €1.2b and total assets of €4.1b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Prosegur Compañía de Seguridad has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From Prosegur Compañía de Seguridad's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Prosegur Compañía de Seguridad shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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