Today we'll evaluate Fieratex S.A. (ATH:FIER) to determine whether it could have potential as an investment idea. 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 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Fieratex:
0.011 = €175k ÷ (€28m - €11m) (Based on the trailing twelve months to June 2019.)
So, Fieratex has an ROCE of 1.1%.
Is Fieratex's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Fieratex's ROCE is meaningfully below the Luxury industry average of 1.6%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Fieratex compares to its industry, its ROCE in absolute terms is low; especially compared to the ~4.9% available in government bonds. It is likely that there are more attractive prospects out there.
Fieratex reported an ROCE of 1.1% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. You can see in the image below how Fieratex's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. If Fieratex is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Fieratex's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Fieratex has total liabilities of €11m and total assets of €28m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Fieratex's ROCE is concerning.
The Bottom Line On Fieratex's ROCE
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If you spot an error that warrants correction, please contact the editor at email@example.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.