Today we are going to look at Optronics Technologies S.A. (ATH:OPTRON) to see whether it might be an attractive investment prospect. 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. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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.
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 Optronics Technologies:
0.59 = €1.7m ÷ (€5.8m - €3.0m) (Based on the trailing twelve months to June 2019.)
Therefore, Optronics Technologies has an ROCE of 59%.
See our latest analysis for Optronics Technologies
Is Optronics Technologies's ROCE Good?
One way to assess ROCE is to compare similar companies. Optronics Technologies's ROCE appears to be substantially greater than the 12% average in the Communications industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Optronics Technologies's ROCE currently appears to be excellent.
Optronics Technologies delivered an ROCE of 59%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Optronics Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. You can check if Optronics Technologies has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.