Today we are going to look at Global EcoPower Société Anonyme (EPA:ALGEP) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is 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. 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 Global EcoPower Société Anonyme:
0.17 = €3.2m ÷ (€47m - €28m) (Based on the trailing twelve months to June 2019.)
Therefore, Global EcoPower Société Anonyme has an ROCE of 17%.
Does Global EcoPower Société Anonyme Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Global EcoPower Société Anonyme's ROCE is meaningfully higher than the 9.0% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Global EcoPower Société Anonyme's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Global EcoPower Société Anonyme currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 4.9%. This makes us think the business might be improving. The image below shows how Global EcoPower Société Anonyme'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Global EcoPower Société Anonyme is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Global EcoPower Société Anonyme'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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Global EcoPower Société Anonyme has current liabilities of €28m and total assets of €47m. As a result, its current liabilities are equal to approximately 60% of its total assets. Global EcoPower Société Anonyme has a relatively high level of current liabilities, boosting its ROCE meaningfully.
The Bottom Line On Global EcoPower Société Anonyme's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. Global EcoPower Société Anonyme 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.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.