AlejaSamochodowa.pl S.A.’s (WSE:ALS) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we'll look at AlejaSamochodowa.pl S.A. (WSE:ALS) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. 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.'

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 AlejaSamochodowa.pl:

0.059 = zł508k ÷ (zł10m - zł1.5m) (Based on the trailing twelve months to December 2018.)

So, AlejaSamochodowa.pl has an ROCE of 5.9%.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Check out our latest analysis for AlejaSamochodowa.pl

Does AlejaSamochodowa.pl Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, AlejaSamochodowa.pl's ROCE appears to be significantly below the 18% average in the Specialty Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, AlejaSamochodowa.pl'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.

As we can see, AlejaSamochodowa.pl currently has an ROCE of 5.9%, less than the 9.5% it reported 3 years ago. So investors might consider if it has had issues recently.

WSE:ALS Past Revenue and Net Income, May 17th 2019
WSE:ALS Past Revenue and Net Income, May 17th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If AlejaSamochodowa.pl is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How AlejaSamochodowa.pl'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

AlejaSamochodowa.pl has total liabilities of zł1.5m and total assets of zł10m. As a result, its current liabilities are equal to approximately 15% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On AlejaSamochodowa.pl's ROCE

That said, AlejaSamochodowa.pl's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.