Today we are going to look at Etn. Fr. Colruyt NV (EBR:COLR) to see whether it might be an attractive investment prospect. 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. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Etn. Fr. Colruyt:
0.19 = €501m ÷ (€4.5b – €1.9b) (Based on the trailing twelve months to September 2019.)
So, Etn. Fr. Colruyt has an ROCE of 19%.
Is Etn. Fr. Colruyt’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Etn. Fr. Colruyt’s ROCE is meaningfully higher than the 8.9% average in the Consumer Retailing industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Etn. Fr. Colruyt’s ROCE currently appears to be excellent.
The image below shows how Etn. Fr. Colruyt’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Etn. Fr. Colruyt’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Etn. Fr. Colruyt has total liabilities of €1.9b and total assets of €4.5b. As a result, its current liabilities are equal to approximately 43% of its total assets. Etn. Fr. Colruyt has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On Etn. Fr. Colruyt’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than Etn. Fr. Colruyt 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
Discounted cash flow calculation for every stock
Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.