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Why Excellence S.A.’s (WSE:EXC) Return On Capital Employed Looks Uninspiring

Simply Wall St

Today we'll evaluate Excellence S.A. (WSE:EXC) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.'

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 Excellence:

0.011 = zł202k ÷ (zł37m - zł18m) (Based on the trailing twelve months to December 2018.)

Therefore, Excellence has an ROCE of 1.1%.

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Does Excellence Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Excellence's ROCE appears to be significantly below the 9.2% average in the Beverage industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Excellence stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Excellence's current ROCE of 1.1% is lower than its ROCE in the past, which was 9.5%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

WSE:EXC Past Revenue and Net Income, May 21st 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 only a point-in-time measure. You can check if Excellence has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Excellence's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Excellence has total assets of zł37m and current liabilities of zł18m. As a result, its current liabilities are equal to approximately 48% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Excellence's ROCE is concerning.

The Bottom Line On Excellence's ROCE

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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.