Why You Should Care About Freelance.com SA’s (EPA:ALFRE) Low Return On Capital

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Today we'll evaluate Freelance.com SA (EPA:ALFRE) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding 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. 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 Freelance.com:

0.12 = €5.8m ÷ (€110m - €63m) (Based on the trailing twelve months to December 2018.)

So, Freelance.com has an ROCE of 12%.

View our latest analysis for Freelance.com

Is Freelance.com's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Freelance.com's ROCE appears meaningfully below the 20% average reported by the Professional Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of where Freelance.com 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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Freelance.com's Current Liabilities Skew 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.

Freelance.com has total assets of €110m and current liabilities of €63m. Therefore its current liabilities are equivalent to approximately 58% of its total assets. Freelance.com's current liabilities are fairly high, which increases its ROCE significantly.

The Bottom Line On Freelance.com's ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Freelance.com 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.