In This Article:
Today we are going to look at Airbus SE (EPA:AIR) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. Generally speaking a higher ROCE is better. 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 Airbus:
0.074 = €4.3b ÷ (€114b - €56b) (Based on the trailing twelve months to September 2019.)
So, Airbus has an ROCE of 7.4%.
Check out our latest analysis for Airbus
Is Airbus's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Airbus's ROCE appears to be significantly below the 9.8% average in the Aerospace & Defense industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Airbus'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.
Our data shows that Airbus currently has an ROCE of 7.4%, compared to its ROCE of 3.5% 3 years ago. This makes us think the business might be improving. The image below shows how Airbus's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Airbus.
What Are Current Liabilities, And How Do They Affect Airbus's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.