Today we'll look at AlejaSamochodowa.pl S.A. (WSE:ALS) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.'
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 AlejaSamochodowa.pl:
0.059 = zł508k ÷ (zł10m - zł1.5m) (Based on the trailing twelve months to December 2018.)
So, AlejaSamochodowa.pl has an ROCE of 5.9%.
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Check out our latest analysis for AlejaSamochodowa.pl
Does AlejaSamochodowa.pl Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, AlejaSamochodowa.pl's ROCE appears to be significantly below the 18% average in the Specialty Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, AlejaSamochodowa.pl's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
As we can see, AlejaSamochodowa.pl currently has an ROCE of 5.9%, less than the 9.5% it reported 3 years ago. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If AlejaSamochodowa.pl is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.