Today we'll look at Flexopack Société Anonyme Commercial and Industrial Plastics Company (ATH:FLEXO) and reflect on its potential as an investment. 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.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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?
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 Flexopack Société Anonyme Commercial and Industrial Plastics:
0.10 = €9.3m ÷ (€116m - €26m) (Based on the trailing twelve months to June 2019.)
Therefore, Flexopack Société Anonyme Commercial and Industrial Plastics has an ROCE of 10%.
Check out our latest analysis for Flexopack Société Anonyme Commercial and Industrial Plastics
Is Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE appears to be around the 11% average of the Packaging industry. Setting aside the industry comparison for now, Flexopack Société Anonyme Commercial and Industrial Plastics's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Flexopack Société Anonyme Commercial and Industrial Plastics'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Flexopack Société Anonyme Commercial and Industrial Plastics? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.