Today we'll evaluate Thessaloniki Water Supply & Sewerage Co S.A. (ATH:EYAPS) to determine whether it could have potential as an investment idea. 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. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Thessaloniki Water Supply & Sewerage Co:
0.11 = €21m ÷ (€210m - €13m) (Based on the trailing twelve months to December 2018.)
Therefore, Thessaloniki Water Supply & Sewerage Co has an ROCE of 11%.
View our latest analysis for Thessaloniki Water Supply & Sewerage Co
Does Thessaloniki Water Supply & Sewerage Co Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Thessaloniki Water Supply & Sewerage Co's ROCE is meaningfully higher than the 5.9% average in the Water Utilities 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. Setting aside the industry comparison for now, Thessaloniki Water Supply & Sewerage Co'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 see in the image below how Thessaloniki Water Supply & Sewerage Co's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. You can check if Thessaloniki Water Supply & Sewerage Co has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.