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Why We’re Not Impressed By Lagardère SCA’s (EPA:MMB) 5.7% ROCE

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  • MMB.PA

Today we are going to look at Lagardère SCA (EPA:MMB) 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 up, we'll look at what ROCE is and how we calculate it. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Lagardère:

0.057 = €345m ÷ (€11b - €4.8b) (Based on the trailing twelve months to June 2019.)

Therefore, Lagardère has an ROCE of 5.7%.

View our latest analysis for Lagardère

Is Lagardère's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Lagardère's ROCE appears to be significantly below the 8.9% average in the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Lagardère stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

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

ENXTPA:MMB Past Revenue and Net Income, January 7th 2020
ENXTPA:MMB Past Revenue and Net Income, January 7th 2020

When considering this metric, keep in mind that it is backwards looking, and 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. 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 Lagardère.

How Lagardère's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Lagardère has total liabilities of €4.8b and total assets of €11b. As a result, its current liabilities are equal to approximately 44% of its total assets. Lagardère's ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On Lagardère's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Lagardère. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Lagardère better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.