In This Article:
Today we are going to look at Aeffe S.p.A. (BIT:AEF) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
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 Aeffe:
0.088 = €31m ÷ (€508m - €155m) (Based on the trailing twelve months to September 2019.)
Therefore, Aeffe has an ROCE of 8.8%.
See our latest analysis for Aeffe
Is Aeffe's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Aeffe's ROCE appears meaningfully below the 11% average reported by the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Aeffe'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.
In our analysis, Aeffe's ROCE appears to be 8.8%, compared to 3 years ago, when its ROCE was 5.3%. This makes us think the business might be improving. You can see in the image below how Aeffe's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Aeffe.