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Today we'll evaluate Emova Group SA (EPA:ALEMV) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Emova Group:
0.037 = €1.5m ÷ (€60m - €19m) (Based on the trailing twelve months to September 2018.)
Therefore, Emova Group has an ROCE of 3.7%.
Check out our latest analysis for Emova Group
Is Emova Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Emova Group's ROCE appears to be significantly below the 8.4% average in the Specialty Retail industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Emova Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Emova Group reported an ROCE of 3.7% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Emova Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.