Yahoo Finance Is Audax Renovables, S.A.’s (BME:ADX) 10% ROCE Any Good?
Today we'll look at Audax Renovables, S.A. (BME:ADX) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.
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 Audax Renovables:
0.10 = €42m ÷ (€774m - €368m) (Based on the trailing twelve months to December 2019.)
So, Audax Renovables has an ROCE of 10%.
See our latest analysis for Audax Renovables
Is Audax Renovables's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Audax Renovables's ROCE is meaningfully better than the 4.1% average in the Renewable Energy 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 where Audax Renovables sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Audax Renovables's current ROCE of 10% is lower than 3 years ago, when the company reported a 14% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Audax Renovables's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Audax Renovables.
What Are Current Liabilities, And How Do They Affect Audax Renovables's 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.
Audax Renovables has total assets of €774m and current liabilities of €368m. Therefore its current liabilities are equivalent to approximately 47% of its total assets. With this level of current liabilities, Audax Renovables's ROCE is boosted somewhat.
What We Can Learn From Audax Renovables's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Audax Renovables shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
