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Revoil S.A. (ATH:REVOIL) Earns Among The Best Returns In Its Industry

Simply Wall St

Today we'll evaluate Revoil S.A. (ATH:REVOIL) 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the 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 Revoil:

0.13 = €3.9m ÷ (€104m - €73m) (Based on the trailing twelve months to December 2018.)

So, Revoil has an ROCE of 13%.

See our latest analysis for Revoil

Does Revoil Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Revoil's ROCE is meaningfully higher than the 10% 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. Aside from the industry comparison, Revoil's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

We can see that , Revoil currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 1.4%. This makes us wonder if the company is improving. The image below shows how Revoil's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ATSE:REVOIL Past Revenue and Net Income, August 16th 2019

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. Given the industry it operates in, Revoil could be considered cyclical. If Revoil is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Revoil's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Revoil has total liabilities of €73m and total assets of €104m. As a result, its current liabilities are equal to approximately 70% of its total assets. With a high level of current liabilities, Revoil will experience a boost to its ROCE.

The Bottom Line On Revoil's ROCE

Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. You might be able to find a better investment than Revoil. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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 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. Thank you for reading.