Today we’ll evaluate Lampsa Hellenic Hotels S.A. (ATH:LAMPS) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Lampsa Hellenic Hotels:
0.14 = €13m ÷ (€183m – €84m) (Based on the trailing twelve months to June 2018.)
So, Lampsa Hellenic Hotels has an ROCE of 14%.
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Is Lampsa Hellenic Hotels’s ROCE Good?
One way to assess ROCE is to compare similar companies. Lampsa Hellenic Hotels’s ROCE appears to be substantially greater than the 8.4% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Lampsa Hellenic Hotels sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Lampsa Hellenic Hotels currently has an ROCE of 14%, compared to its ROCE of 5.0% 3 years ago. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. You can check if Lampsa Hellenic Hotels has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.