Is Pharmanutra S.p.A.’s (BIT:PHN) 39% ROCE Any Good?
Today we'll look at Pharmanutra S.p.A. (BIT:PHN) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Pharmanutra:
0.39 = €11m ÷ (€41m - €13m) (Based on the trailing twelve months to December 2018.)
Therefore, Pharmanutra has an ROCE of 39%.
View our latest analysis for Pharmanutra
Does Pharmanutra Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Pharmanutra's ROCE is meaningfully higher than the 14% average in the Personal Products 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. Setting aside the comparison to its industry for a moment, Pharmanutra's ROCE in absolute terms currently looks quite high.
As we can see, Pharmanutra currently has an ROCE of 39%, less than the 53% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Pharmanutra.
How Pharmanutra's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Pharmanutra has total liabilities of €13m and total assets of €41m. As a result, its current liabilities are equal to approximately 31% of its total assets. A medium level of current liabilities boosts Pharmanutra's ROCE somewhat.
Our Take On Pharmanutra's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than Pharmanutra 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
