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Société de Services, de Participations, de Direction et d'Elaboration (EBR:SPA) Is Employing Capital Very Effectively

Simply Wall St

Today we'll look at Société de Services, de Participations, de Direction et d'Elaboration (EBR:SPA) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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 'return' (pre-tax profit) a company generates from capital employed 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?

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 Société de Services de Participations de Direction et d'Elaboration:

0.20 = €54m ÷ (€387m - €120m) (Based on the trailing twelve months to December 2018.)

Therefore, Société de Services de Participations de Direction et d'Elaboration has an ROCE of 20%.

See our latest analysis for Société de Services de Participations de Direction et d'Elaboration

Does Société de Services de Participations de Direction et d'Elaboration Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Société de Services de Participations de Direction et d'Elaboration's ROCE is meaningfully better than the 9.5% average in the Beverage industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Société de Services de Participations de Direction et d'Elaboration's ROCE is currently very good.

The image below shows how Société de Services de Participations de Direction et d'Elaboration's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTBR:SPA Past Revenue and Net Income, August 19th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. You can check if Société de Services de Participations de Direction et d'Elaboration has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Société de Services de Participations de Direction et d'Elaboration'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.

Société de Services de Participations de Direction et d'Elaboration has total liabilities of €120m and total assets of €387m. As a result, its current liabilities are equal to approximately 31% of its total assets. A medium level of current liabilities boosts Société de Services de Participations de Direction et d'Elaboration's ROCE somewhat.

Our Take On Société de Services de Participations de Direction et d'Elaboration's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. Société de Services de Participations de Direction et d'Elaboration 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.

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.