Today we are going to look at Société Fermière du Casino Municipal de Cannes (EPA:FCMC) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. 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 Société Fermière du Casino Municipal de Cannes:
0.076 = €25m ÷ (€386m - €54m) (Based on the trailing twelve months to April 2019.)
Therefore, Société Fermière du Casino Municipal de Cannes has an ROCE of 7.6%.
Does Société Fermière du Casino Municipal de Cannes Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Société Fermière du Casino Municipal de Cannes's ROCE is meaningfully higher than the 6.1% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Aside from the industry comparison, Société Fermière du Casino Municipal de Cannes's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Société Fermière du Casino Municipal de Cannes's past growth compares to other companies.
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. How cyclical is Société Fermière du Casino Municipal de Cannes? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Société Fermière du Casino Municipal de Cannes'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Société Fermière du Casino Municipal de Cannes has total liabilities of €54m and total assets of €386m. As a result, its current liabilities are equal to approximately 14% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From Société Fermière du Casino Municipal de Cannes's ROCE
If Société Fermière du Casino Municipal de Cannes continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Société Fermière du Casino Municipal de Cannes. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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.