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Today we'll look at CTT - Correios De Portugal, S.A. (ELI:CTT) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. 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.'
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 CTT - Correios De Portugal:
0.094 = €47m ÷ (€1.8b - €1.3b) (Based on the trailing twelve months to March 2019.)
Therefore, CTT - Correios De Portugal has an ROCE of 9.4%.
Is CTT - Correios De Portugal's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, CTT - Correios De Portugal's ROCE appears to be significantly below the 13% average in the Logistics industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, CTT - Correios De Portugal'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 , CTT - Correios De Portugal currently has an ROCE of 9.4%, less than the 18% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how CTT - Correios De Portugal's ROCE compares to its industry. Click to see more on past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CTT - Correios De Portugal.
Do CTT - Correios De Portugal's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
CTT - Correios De Portugal has total liabilities of €1.3b and total assets of €1.8b. Therefore its current liabilities are equivalent to approximately 73% of its total assets. CTT - Correios De Portugal has a fairly high level of current liabilities, meaningfully impacting its ROCE.
Our Take On CTT - Correios De Portugal's ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. Of course, you might also be able to find a better stock than CTT - Correios De Portugal. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org. 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.