Today we are going to look at Groupe Minoteries SA (VTX:GMI) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 Groupe Minoteries:
0.045 = CHF5.1m ÷ (CHF133m - CHF20m) (Based on the trailing twelve months to December 2018.)
So, Groupe Minoteries has an ROCE of 4.5%.
See our latest analysis for Groupe Minoteries
Does Groupe Minoteries Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Groupe Minoteries's ROCE appears meaningfully below the 10% average reported by the Food industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Groupe Minoteries stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
You can see in the image below how Groupe Minoteries's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. How cyclical is Groupe Minoteries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Groupe Minoteries's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.