In This Article:
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Today we'll look at Acheter-Louer.Fr SA (EPA:ALALO) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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?
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 Acheter-Louer.Fr:
0.012 = €134k ÷ (€12m - €1.3m) (Based on the trailing twelve months to December 2018.)
So, Acheter-Louer.Fr has an ROCE of 1.2%.
View our latest analysis for Acheter-Louer.Fr
Does Acheter-Louer.Fr Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Acheter-Louer.Fr's ROCE is meaningfully below the Interactive Media and Services industry average of 21%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Acheter-Louer.Fr compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.7% available in government bonds. Readers may wish to look for more rewarding investments.
Acheter-Louer.Fr reported an ROCE of 1.2% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Acheter-Louer.Fr's past growth compares to other companies.
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 Acheter-Louer.Fr has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.