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# What We Think Of Gr. Sarantis S.A.’s (ATH:SAR) Investment Potential

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Today we’ll look at Gr. Sarantis S.A. (ATH:SAR) and reflect on its potential as an investment. 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

### Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Gr. Sarantis:

0.15 = €35m ÷ (€333m – €102m) (Based on the trailing twelve months to June 2018.)

So, Gr. Sarantis has an ROCE of 15%.

### Is Gr. Sarantis’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Gr. Sarantis’s ROCE is fairly close to the Personal Products industry average of 14%. Regardless of where Gr. Sarantis sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

As we can see, Gr. Sarantis currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 12%. This makes us think about whether the company has been reinvesting shrewdly.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. 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 Gr. Sarantis’s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Gr. Sarantis has total liabilities of €102m and total assets of €333m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Gr. Sarantis has a middling amount of current liabilities, increasing its ROCE somewhat.

### The Bottom Line On Gr. Sarantis’s ROCE

Gr. Sarantis’s ROCE does look good, but the level of current liabilities also contribute to that. But note: Gr. Sarantis may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.