In This Article:
Today we'll look at Assystem S.A. (EPA:ASY) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Assystem:
0.06 = €32m ÷ (€714m - €174m) (Based on the trailing twelve months to June 2019.)
Therefore, Assystem has an ROCE of 6.0%.
View our latest analysis for Assystem
Is Assystem's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Assystem's ROCE appears meaningfully below the 15% average reported by the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Assystem stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Assystem's current ROCE of 6.0% is lower than its ROCE in the past, which was 9.0%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Assystem's ROCE compares to its industry. Click to see more on past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Assystem.
What Are Current Liabilities, And How Do They Affect Assystem's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.