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Today we are going to look at Eurocash S.A. (WSE:EUR) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. In general, businesses with a higher ROCE are usually better quality. 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'.

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 Eurocash:

0.056 = zł146m ÷ (zł8.2b - zł5.5b) (Based on the trailing twelve months to March 2019.)

So, Eurocash has an ROCE of 5.6%.

See our latest analysis for Eurocash

Does Eurocash Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Eurocash's ROCE appears to be significantly below the 7.3% average in the Consumer Retailing industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Eurocash stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

Eurocash's current ROCE of 5.6% is lower than its ROCE in the past, which was 23%, 3 years ago. So investors might consider if it has had issues recently.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Eurocash.