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Today we'll look at AdVini S.A. (EPA:ADVI) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 AdVini:
0.012 = €2.1m ÷ (€386m - €212m) (Based on the trailing twelve months to December 2018.)
Therefore, AdVini has an ROCE of 1.2%.
See our latest analysis for AdVini
Is AdVini's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see AdVini's ROCE is meaningfully below the Beverage industry average of 4.4%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside AdVini's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
AdVini's current ROCE of 1.2% is lower than 3 years ago, when the company reported a 8.0% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how AdVini'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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.