Today we'll evaluate Revoil S.A. (ATH:REVOIL) to determine whether it could have potential as an investment idea. 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. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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.
How Do You Calculate Return On Capital Employed?
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 Revoil:
0.096 = €4.4m ÷ (€107m - €61m) (Based on the trailing twelve months to June 2019.)
Therefore, Revoil has an ROCE of 9.6%.
See our latest analysis for Revoil
Is Revoil's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Revoil's ROCE is fairly close to the Oil and Gas industry average of 9.3%. Setting aside the industry comparison for now, Revoil'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.
Our data shows that Revoil currently has an ROCE of 9.6%, compared to its ROCE of 6.5% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Revoil's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. We note Revoil could be considered a cyclical business. You can check if Revoil has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Revoil's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.