Today we are going to look at ELES Semiconductor Equipment S.p.A. (BIT:ELES) 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 of all, we'll work out how to 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.

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 ELES Semiconductor Equipment:

0.065 = €1.2m ÷ (€24m - €5.5m) (Based on the trailing twelve months to December 2019.)

So, ELES Semiconductor Equipment has an ROCE of 6.5%.

See our latest analysis for ELES Semiconductor Equipment

Does ELES Semiconductor Equipment Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, ELES Semiconductor Equipment's ROCE appears to be significantly below the 10% average in the Semiconductor industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, ELES Semiconductor Equipment's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how ELES Semiconductor Equipment's past growth compares to other companies.

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect ELES Semiconductor Equipment's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.