Yahoo Finance Is EssilorLuxottica Société anonyme (EPA:EL) Struggling With Its 4.3% Return On Capital Employed?
Today we are going to look at EssilorLuxottica Société anonyme (EPA:EL) 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. Then we'll compare its ROCE to similar companies. 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 EssilorLuxottica Société anonyme:
0.043 = €2.0b ÷ (€53b - €5.6b) (Based on the trailing twelve months to December 2019.)
So, EssilorLuxottica Société anonyme has an ROCE of 4.3%.
Check out our latest analysis for EssilorLuxottica Société anonyme
Is EssilorLuxottica Société anonyme's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, EssilorLuxottica Société anonyme's ROCE appears to be significantly below the 12% average in the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, EssilorLuxottica Société anonyme'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.
EssilorLuxottica Société anonyme's current ROCE of 4.3% is lower than its ROCE in the past, which was 13%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how EssilorLuxottica Société anonyme'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 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 EssilorLuxottica Société anonyme'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
EssilorLuxottica Société anonyme has current liabilities of €5.6b and total assets of €53b. Therefore its current liabilities are equivalent to approximately 11% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
The Bottom Line On EssilorLuxottica Société anonyme's ROCE
If EssilorLuxottica Société anonyme continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than EssilorLuxottica Société anonyme. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
