In This Article:
Today we are going to look at Gestamp Automoción, S.A. (BME:GEST) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Gestamp Automoción:
0.077 = €469m ÷ (€8.5b - €2.5b) (Based on the trailing twelve months to June 2019.)
So, Gestamp Automoción has an ROCE of 7.7%.
See our latest analysis for Gestamp Automoción
Is Gestamp Automoción's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Gestamp Automoción's ROCE appears to be around the 9.6% average of the Auto Components industry. Aside from the industry comparison, Gestamp Automoción'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.
Gestamp Automoción's current ROCE of 7.7% is lower than 3 years ago, when the company reported a 10% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Gestamp Automoción'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Gestamp Automoción.
How Gestamp Automoción's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.