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Kering SA (EPA:KER) Earns Among The Best Returns In Its Industry

Simply Wall St

Today we are going to look at Kering SA (EPA:KER) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. 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 amount of pre-tax profits a company can generate from the 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. 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 Kering:

0.25 = €4.8b ÷ (€27b - €8.1b) (Based on the trailing twelve months to December 2019.)

Therefore, Kering has an ROCE of 25%.

See our latest analysis for Kering

Is Kering's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Kering's ROCE appears to be substantially greater than the 12% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Kering's ROCE is currently very good.

In our analysis, Kering's ROCE appears to be 25%, compared to 3 years ago, when its ROCE was 9.8%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Kering's past growth compares to other companies.

ENXTPA:KER Past Revenue and Net Income April 23rd 2020

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Kering.

Kering's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Kering has total assets of €27b and current liabilities of €8.1b. As a result, its current liabilities are equal to approximately 30% of its total assets. Kering has a medium level of current liabilities, boosting its ROCE somewhat.

What We Can Learn From Kering's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Kering 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.

I will like Kering 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.