Today we are going to look at Lacroix SA (EPA:LACR) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Lacroix:
0.11 = €20m ÷ (€327m - €149m) (Based on the trailing twelve months to September 2019.)
Therefore, Lacroix has an ROCE of 11%.
Does Lacroix Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Lacroix's ROCE is meaningfully higher than the 7.6% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Lacroix sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Lacroix currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 6.3%. This makes us think the business might be improving. The image below shows how Lacroix's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Lacroix.
What Are Current Liabilities, And How Do They Affect Lacroix's 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Lacroix has total assets of €327m and current liabilities of €149m. As a result, its current liabilities are equal to approximately 46% of its total assets. With this level of current liabilities, Lacroix's ROCE is boosted somewhat.
The Bottom Line On Lacroix's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Lacroix shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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