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Why EDAP TMS S.A.’s (NASDAQ:EDAP) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we are going to look at EDAP TMS S.A. (NASDAQ:EDAP) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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'.

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 EDAP TMS:

0.063 = €2.0m ÷ (€49m - €17m) (Based on the trailing twelve months to June 2019.)

Therefore, EDAP TMS has an ROCE of 6.3%.

View our latest analysis for EDAP TMS

Does EDAP TMS Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, EDAP TMS's ROCE appears to be significantly below the 10% average in the Medical Equipment industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, EDAP TMS'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.

The image below shows how EDAP TMS's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGM:EDAP Past Revenue and Net Income, August 30th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 EDAP TMS'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.

EDAP TMS has total assets of €49m and current liabilities of €17m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. EDAP TMS's ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On EDAP TMS's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.