Is Griñó Ecologic, S.A. (BME:GRI) Investing Your Capital Efficiently?
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Today we'll evaluate Griñó Ecologic, S.A. (BME:GRI) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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'.
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 Griñó Ecologic:
0.021 = €737k ÷ (€54m - €18m) (Based on the trailing twelve months to December 2018.)
Therefore, Griñó Ecologic has an ROCE of 2.1%.
Check out our latest analysis for Griñó Ecologic
Does Griñó Ecologic Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Griñó Ecologic's ROCE appears to be significantly below the 9.6% average in the Commercial Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Griñó Ecologic's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. You can check if Griñó Ecologic has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Griñó Ecologic's 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.
Griñó Ecologic has total liabilities of €18m and total assets of €54m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Griñó Ecologic's ROCE is concerning.
Our Take On Griñó Ecologic's ROCE
So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Griñó Ecologic. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
