Why Vista Alegre Atlantis, SGPS, S.A.’s (ELI:VAF) Use Of Investor Capital Doesn’t Look Great

Today we are going to look at Vista Alegre Atlantis, SGPS, S.A. (ELI:VAF) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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. Generally speaking a higher ROCE is better. 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 Vista Alegre Atlantis SGPS:

0.096 = €14m ÷ (€227m - €85m) (Based on the trailing twelve months to June 2019.)

Therefore, Vista Alegre Atlantis SGPS has an ROCE of 9.6%.

Check out our latest analysis for Vista Alegre Atlantis SGPS

Does Vista Alegre Atlantis SGPS Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Vista Alegre Atlantis SGPS's ROCE appears meaningfully below the 12% average reported by the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Vista Alegre Atlantis SGPS's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

We can see that, Vista Alegre Atlantis SGPS currently has an ROCE of 9.6% compared to its ROCE 3 years ago, which was 2.4%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Vista Alegre Atlantis SGPS'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. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Vista Alegre Atlantis SGPS.

Do Vista Alegre Atlantis SGPS'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. 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.

Vista Alegre Atlantis SGPS has total liabilities of €85m and total assets of €227m. As a result, its current liabilities are equal to approximately 37% of its total assets. Vista Alegre Atlantis SGPS's ROCE is improved somewhat by its moderate amount of current liabilities.

What We Can Learn From Vista Alegre Atlantis SGPS's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Vista Alegre Atlantis SGPS 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.