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How Do Vicat SA’s (EPA:VCT) Returns On Capital Compare To Peers?

Simply Wall St

Today we'll look at Vicat SA (EPA:VCT) 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.

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

What is 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?

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 Vicat:

0.044 = €200m ÷ (€5.5b - €933m) (Based on the trailing twelve months to June 2019.)

Therefore, Vicat has an ROCE of 4.4%.

Check out our latest analysis for Vicat

Is Vicat's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Vicat's ROCE appears to be significantly below the 9.1% average in the Basic Materials industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Vicat's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

We can see that , Vicat currently has an ROCE of 4.4%, less than the 6.3% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Vicat's past growth compares to other companies.

ENXTPA:VCT Past Revenue and Net Income, August 12th 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Vicat's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.

Vicat has total assets of €5.5b and current liabilities of €933m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Vicat's ROCE

That said, Vicat's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Vicat. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Vicat better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.