Today we'll evaluate Groupe LDLC société anonyme (EPA:ALLDL) to determine whether it could have potential as an investment idea. 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. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.

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 Groupe LDLC société anonyme:

0.02 = €2.1m ÷ (€218m - €113m) (Based on the trailing twelve months to September 2019.)

So, Groupe LDLC société anonyme has an ROCE of 2.0%.

View our latest analysis for Groupe LDLC société anonyme

Is Groupe LDLC société anonyme's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Groupe LDLC société anonyme's ROCE appears to be significantly below the 12% average in the Online Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Groupe LDLC société anonyme compares to its industry, its ROCE in absolute terms is low; especially compared to the ~-0.1% available in government bonds. It is likely that there are more attractive prospects out there.

Groupe LDLC société anonyme's current ROCE of 2.0% is lower than its ROCE in the past, which was 16%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Groupe LDLC société anonyme's past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 Groupe LDLC société anonyme.

Do Groupe LDLC société anonyme's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

Groupe LDLC société anonyme has total liabilities of €113m and total assets of €218m. As a result, its current liabilities are equal to approximately 52% of its total assets. Groupe LDLC société anonyme has a fairly high level of current liabilities, boosting its ROCE.

Our Take On Groupe LDLC société anonyme's ROCE

, You might be able to find a better investment than Groupe LDLC société anonyme. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Groupe LDLC société anonyme better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.