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Today we'll look at Acheter-Louer.Fr SA (EPA:ALALO) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.

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 Acheter-Louer.Fr:

0.012 = €134k ÷ (€12m - €1.3m) (Based on the trailing twelve months to December 2018.)

So, Acheter-Louer.Fr has an ROCE of 1.2%.

View our latest analysis for Acheter-Louer.Fr

Does Acheter-Louer.Fr Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Acheter-Louer.Fr's ROCE is meaningfully below the Interactive Media and Services industry average of 21%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Acheter-Louer.Fr compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.7% available in government bonds. Readers may wish to look for more rewarding investments.

Acheter-Louer.Fr reported an ROCE of 1.2% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Acheter-Louer.Fr's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. You can check if Acheter-Louer.Fr has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Acheter-Louer.Fr's Current Liabilities Impact Its 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Acheter-Louer.Fr has total assets of €12m and current liabilities of €1.3m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From Acheter-Louer.Fr's ROCE

While that is good to see, Acheter-Louer.Fr has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Acheter-Louer.Fr. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.