Yahoo Finance Are AURES Technologies S.A.’s (EPA:AURS) High Returns Really That Great?
Today we are going to look at AURES Technologies S.A. (EPA:AURS) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 AURES Technologies:
0.17 = €7.5m ÷ (€84m - €40m) (Based on the trailing twelve months to June 2019.)
So, AURES Technologies has an ROCE of 17%.
See our latest analysis for AURES Technologies
Is AURES Technologies's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that AURES Technologies's ROCE is meaningfully better than the 7.8% average in the Electronic industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how AURES Technologies compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, AURES Technologies currently has an ROCE of 17%, less than the 43% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how AURES Technologies's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 AURES Technologies.
How AURES Technologies's Current Liabilities Impact Its 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 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.
AURES Technologies has total assets of €84m and current liabilities of €40m. As a result, its current liabilities are equal to approximately 47% of its total assets. With this level of current liabilities, AURES Technologies's ROCE is boosted somewhat.
The Bottom Line On AURES Technologies's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. AURES Technologies 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.
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 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.
