Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

Today we’ll evaluate Econocom Group SE (EBR:ECONB) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Econocom Group:

0.11 = €152m ÷ (€2.6b – €1.4b) (Based on the trailing twelve months to June 2018.)

Therefore, Econocom Group has an ROCE of 11%.

View our latest analysis for Econocom Group

Is Econocom Group’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Econocom Group’s ROCE is fairly close to the IT industry average of 13%. Independently of how Econocom Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Econocom Group’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Econocom Group has total assets of €2.6b and current liabilities of €1.4b. As a result, its current liabilities are equal to approximately 54% of its total assets. Econocom Group’s current liabilities are fairly high, which increases its ROCE significantly.

What We Can Learn From Econocom Group’s ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. But note: Econocom Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.