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Today we'll evaluate The Navigator Company, S.A. (ELI:NVG) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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'.
How Do You Calculate Return On Capital Employed?
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 Navigator Company:
0.13 = €301m ÷ (€2.8b - €439m) (Based on the trailing twelve months to March 2019.)
Therefore, Navigator Company has an ROCE of 13%.
Check out our latest analysis for Navigator Company
Is Navigator Company's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Navigator Company's ROCE is meaningfully higher than the 9.6% average in the Forestry industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Navigator Company's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Navigator Company's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Navigator Company.