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Today we'll evaluate Columbus Energy S.A. (WSE:CLC) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 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?
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 Columbus Energy:
0.16 = zł5.2m ÷ (zł53m - zł21m) (Based on the trailing twelve months to March 2019.)
Therefore, Columbus Energy has an ROCE of 16%.
Check out our latest analysis for Columbus Energy
Does Columbus Energy Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Columbus Energy's ROCE is meaningfully higher than the 9.6% average in the Electrical industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Columbus Energy compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Columbus Energy delivered an ROCE of 16%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.
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. ROCE is only a point-in-time measure. If Columbus Energy is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Columbus Energy'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 counteract this, we check if a company has high current liabilities, relative to its total assets.