Why You Should Like Quadpack Industries, S.A.’s (EPA:MLQP) ROCE
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Today we'll evaluate Quadpack Industries, S.A. (EPA:MLQP) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Quadpack Industries:
0.19 = €4.9m ÷ (€53m - €27m) (Based on the trailing twelve months to January 2018.)
Therefore, Quadpack Industries has an ROCE of 19%.
View our latest analysis for Quadpack Industries
Is Quadpack Industries's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Quadpack Industries's ROCE is meaningfully better than the 13% average in the Packaging industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Quadpack Industries's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Quadpack Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Quadpack Industries's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Quadpack Industries has total liabilities of €27m and total assets of €53m. As a result, its current liabilities are equal to approximately 50% of its total assets. Quadpack Industries's current liabilities are fairly high, which increases its ROCE significantly.
Our Take On Quadpack Industries's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. Quadpack Industries 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.
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 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.
