Why Robertet SA’s (EPA:RBT) Return On Capital Employed Is Impressive

Today we'll look at Robertet SA (EPA:RBT) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Robertet:

0.14 = €74m ÷ (€662m - €138m) (Based on the trailing twelve months to June 2019.)

So, Robertet has an ROCE of 14%.

See our latest analysis for Robertet

Is Robertet's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Robertet's ROCE appears to be substantially greater than the 4.7% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Robertet sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Robertet's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTPA:RBT Past Revenue and Net Income, December 16th 2019
ENXTPA:RBT Past Revenue and Net Income, December 16th 2019

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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Robertet.

What Are Current Liabilities, And How Do They Affect Robertet's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Robertet has total assets of €662m and current liabilities of €138m. As a result, its current liabilities are equal to approximately 21% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Robertet's ROCE

With that in mind, Robertet's ROCE appears pretty good. There might be better investments than Robertet 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.

I will like Robertet 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.

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