Today we'll evaluate Publicis Groupe S.A. (EPA:PUB) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Publicis Groupe:
0.12 = €1.6b ÷ (€29b - €15b) (Based on the trailing twelve months to June 2019.)
So, Publicis Groupe has an ROCE of 12%.
Does Publicis Groupe Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Publicis Groupe's ROCE appears to be substantially greater than the 8.9% average in the Media 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. Regardless of where Publicis Groupe sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Publicis Groupe's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Publicis Groupe's 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.
Publicis Groupe has total liabilities of €15b and total assets of €29b. Therefore its current liabilities are equivalent to approximately 52% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
What We Can Learn From Publicis Groupe's ROCE
While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than Publicis Groupe 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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