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Why We Like Société Marseillaise du Tunnel Prado Carénage’s (EPA:SMTPC) 27% Return On Capital Employed

Simply Wall St

Today we'll look at Société Marseillaise du Tunnel Prado Carénage (EPA:SMTPC) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Société Marseillaise du Tunnel Prado Carénage:

0.27 = €18m ÷ (€68m - €1.4m) (Based on the trailing twelve months to June 2019.)

So, Société Marseillaise du Tunnel Prado Carénage has an ROCE of 27%.

Check out our latest analysis for Société Marseillaise du Tunnel Prado Carénage

Is Société Marseillaise du Tunnel Prado Carénage's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Société Marseillaise du Tunnel Prado Carénage's ROCE appears to be substantially greater than the 9.3% average in the Infrastructure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Société Marseillaise du Tunnel Prado Carénage's ROCE is currently very good.

You can see in the image below how Société Marseillaise du Tunnel Prado Carénage's ROCE compares to its industry. Click to see more on past growth.

ENXTPA:SMTPC Past Revenue and Net Income, November 23rd 2019

It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Société Marseillaise du Tunnel Prado Carénage.

Société Marseillaise du Tunnel Prado Carénage's Current Liabilities And Their Impact On 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Société Marseillaise du Tunnel Prado Carénage has total assets of €68m and current liabilities of €1.4m. As a result, its current liabilities are equal to approximately 2.1% of its total assets. Minimal current liabilities are not distorting Société Marseillaise du Tunnel Prado Carénage's impressive ROCE.

The Bottom Line On Société Marseillaise du Tunnel Prado Carénage's ROCE

This should mark the company as worthy of further investigation. There might be better investments than Société Marseillaise du Tunnel Prado Carénage out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Société Marseillaise du Tunnel Prado Carénage 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.