Today we'll look at Publicis Groupe S.A. (EPA:PUB) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Publicis Groupe:
0.13 = €1.6b ÷ (€27b - €15b) (Based on the trailing twelve months to December 2018.)
So, Publicis Groupe has an ROCE of 13%.
Does Publicis Groupe Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Publicis Groupe's ROCE appears to be substantially greater than the 9.4% average in the Media 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 Publicis Groupe sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Publicis Groupe.
Do Publicis Groupe's Current Liabilities Skew 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. 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.
Publicis Groupe has total liabilities of €15b and total assets of €27b. Therefore its current liabilities are equivalent to approximately 57% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On Publicis Groupe's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Publicis Groupe looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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