Yahoo Finance A Close Look At LVMH Moët Hennessy - Louis Vuitton, Société Européenne’s (EPA:MC) 15% ROCE
Today we'll evaluate LVMH Moët Hennessy - Louis Vuitton, Société Européenne (EPA:MC) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. In brief, it is a useful tool, but it is not without drawbacks. 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 LVMH Moët Hennessy - Louis Vuitton Société Européenne:
0.15 = €11b ÷ (€91b - €21b) (Based on the trailing twelve months to June 2019.)
Therefore, LVMH Moët Hennessy - Louis Vuitton Société Européenne has an ROCE of 15%.
See our latest analysis for LVMH Moët Hennessy - Louis Vuitton Société Européenne
Does LVMH Moët Hennessy - Louis Vuitton Société Européenne Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROCE is meaningfully higher than the 12% average in the Luxury 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. Independently of how LVMH Moët Hennessy - Louis Vuitton Société Européenne compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for LVMH Moët Hennessy - Louis Vuitton Société Européenne.
What Are Current Liabilities, And How Do They Affect LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.
LVMH Moët Hennessy - Louis Vuitton Société Européenne has total liabilities of €21b and total assets of €91b. As a result, its current liabilities are equal to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On LVMH Moët Hennessy - Louis Vuitton Société Européenne's ROCE
This is good to see, and with a sound ROCE, LVMH Moët Hennessy - Louis Vuitton Société Européenne could be worth a closer look. LVMH Moët Hennessy - Louis Vuitton Société Européenne 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.
I will like LVMH Moët Hennessy - Louis Vuitton Société Européenne 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.
