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Today we are going to look at We.Connect SA (EPA:ALWEC) 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. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 We.Connect:
0.12 = €4.9m ÷ (€91m - €50m) (Based on the trailing twelve months to December 2018.)
Therefore, We.Connect has an ROCE of 12%.
View our latest analysis for We.Connect
Does We.Connect Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, We.Connect's ROCE appears to be around the 12% average of the Retail Distributors industry. Independently of how We.Connect compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , We.Connect currently has an ROCE of 12%, less than the 19% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how We.Connect's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. How cyclical is We.Connect? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How We.Connect's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.