Today we'll look at Les Docks des Pétroles d'Ambès SA (EPA:DPAM) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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 Les Docks des Pétroles d'Ambès:
0.11 = €6.6m ÷ (€63m - €2.1m) (Based on the trailing twelve months to June 2018.)
Therefore, Les Docks des Pétroles d'Ambès has an ROCE of 11%.
Is Les Docks des Pétroles d'Ambès's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Les Docks des Pétroles d'Ambès's ROCE is meaningfully higher than the 7.6% average in the Oil and Gas industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Les Docks des Pétroles d'Ambès sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
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. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Les Docks des Pétroles d'Ambès are cyclical businesses. If Les Docks des Pétroles d'Ambès is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Les Docks des Pétroles d'Ambès's Current Liabilities And Their Impact On Its 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.
Les Docks des Pétroles d'Ambès has total liabilities of €2.1m and total assets of €63m. Therefore its current liabilities are equivalent to approximately 3.3% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Les Docks des Pétroles d'Ambès earns a sound return on capital employed.
Our Take On Les Docks des Pétroles d'Ambès's ROCE
If it is able to keep this up, Les Docks des Pétroles d'Ambès could be attractive. There might be better investments than Les Docks des Pétroles d'Ambès out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.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.