Today we are going to look at Resilux NV (EBR:RES) to see whether it might be an attractive investment prospect. 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. 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Resilux:
0.15 = €25m ÷ (€312m - €140m) (Based on the trailing twelve months to June 2019.)
Therefore, Resilux has an ROCE of 15%.
Check out our latest analysis for Resilux
Is Resilux's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Resilux's ROCE is meaningfully better than the 11% average in the Packaging industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Resilux compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Resilux currently has an ROCE of 15%, less than the 25% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Resilux's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Resilux.
What Are Current Liabilities, And How Do They Affect Resilux's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.