Are Compagnie Du Mont-Blanc’s (EPA:MLCMB) Returns On Investment Worth Your While?

Today we'll evaluate Compagnie Du Mont-Blanc (EPA:MLCMB) to determine whether it could have potential as an investment idea. 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Compagnie Du Mont-Blanc:

0.074 = €20m ÷ (€321m - €58m) (Based on the trailing twelve months to May 2019.)

Therefore, Compagnie Du Mont-Blanc has an ROCE of 7.4%.

View our latest analysis for Compagnie Du Mont-Blanc

Does Compagnie Du Mont-Blanc Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Compagnie Du Mont-Blanc's ROCE appears to be around the 6.6% average of the Hospitality industry. Aside from the industry comparison, Compagnie Du Mont-Blanc'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.

The image below shows how Compagnie Du Mont-Blanc's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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

Do Compagnie Du Mont-Blanc's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Compagnie Du Mont-Blanc has total assets of €321m and current liabilities of €58m. Therefore its current liabilities are equivalent to approximately 18% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Compagnie Du Mont-Blanc's ROCE

If Compagnie Du Mont-Blanc continues to earn an uninspiring ROCE, there may be better places to invest. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.