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Should You Like The Unilever Group’s (AMS:UNA) High Return On Capital Employed?

Simply Wall St

Today we are going to look at The Unilever Group (AMS:UNA) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.

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 Unilever Group:

0.29 = €13b ÷ (€65b - €22b) (Based on the trailing twelve months to June 2019.)

So, Unilever Group has an ROCE of 29%.

See our latest analysis for Unilever Group

Does Unilever Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Unilever Group's ROCE is meaningfully higher than the 11% average in the Personal Products industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Unilever Group's ROCE in absolute terms currently looks quite high.

In our analysis, Unilever Group's ROCE appears to be 29%, compared to 3 years ago, when its ROCE was 23%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Unilever Group's past growth compares to other companies.

ENXTAM:UNA Past Revenue and Net Income, December 14th 2019

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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Unilever Group.

How Unilever Group's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Unilever Group has total liabilities of €22b and total assets of €65b. As a result, its current liabilities are equal to approximately 34% of its total assets. Unilever Group has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On Unilever Group's ROCE

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

Unilever Group is not the only stock that insiders are buying. 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.