Today we'll look at Jacquet Metal Service SA (EPA:JCQ) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 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. 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'.

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 Jacquet Metal Service:

0.095 = €71m ÷ (€1.2b - €500m) (Based on the trailing twelve months to June 2019.)

Therefore, Jacquet Metal Service has an ROCE of 9.5%.

See our latest analysis for Jacquet Metal Service

Is Jacquet Metal Service's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Jacquet Metal Service's ROCE is around the 9.0% average reported by the Trade Distributors industry. Separate from Jacquet Metal Service's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, Jacquet Metal Service's ROCE appears to be 9.5%, compared to 3 years ago, when its ROCE was 1.3%. This makes us think the business might be improving. The image below shows how Jacquet Metal Service'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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Jacquet Metal Service.

What Are Current Liabilities, And How Do They Affect Jacquet Metal Service's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.

Jacquet Metal Service has current liabilities of €500m and total assets of €1.2b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. With this level of current liabilities, Jacquet Metal Service's ROCE is boosted somewhat.

Our Take On Jacquet Metal Service's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Jacquet Metal Service shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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.