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Today we'll look at L.D.C. S.A. (EPA:LOUP) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. 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 '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. 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 L.D.C:

0.11 = €176m ÷ (€2.6b - €956m) (Based on the trailing twelve months to August 2018.)

Therefore, L.D.C has an ROCE of 11%.

Check out our latest analysis for L.D.C

Does L.D.C Have A Good ROCE?

One way to assess ROCE is to compare similar companies. L.D.C's ROCE appears to be substantially greater than the 6.9% average in the Food industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from L.D.C's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

L.D.C's current ROCE of 11% is lower than its ROCE in the past, which was 17%, 3 years ago. So investors might consider if it has had issues recently.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

L.D.C's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.