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Today we'll evaluate JCDecaux SA (EPA:DEC) 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. 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.
Understanding Return On Capital Employed (ROCE)
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. In brief, it is a useful tool, but it is not without drawbacks. 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 JCDecaux:
0.057 = €235m ÷ (€5.8b - €1.6b) (Based on the trailing twelve months to December 2018.)
Therefore, JCDecaux has an ROCE of 5.7%.
Check out our latest analysis for JCDecaux
Does JCDecaux Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see JCDecaux's ROCE is meaningfully below the Media industry average of 9.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, JCDecaux's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , JCDecaux currently has an ROCE of 5.7%, less than the 8.6% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how JCDecaux's past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for JCDecaux.