Why Atos SE’s (EPA:ATO) Return On Capital Employed Looks Uninspiring
Today we'll look at Atos SE (EPA:ATO) and reflect on its potential as an investment. 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 of all, we'll work out how to 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 Atos:
0.088 = €1.2b ÷ (€19b - €6.0b) (Based on the trailing twelve months to June 2019.)
Therefore, Atos has an ROCE of 8.8%.
See our latest analysis for Atos
Does Atos Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Atos's ROCE appears meaningfully below the 12% average reported by the IT industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of where Atos sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Atos's past growth compares to other companies.
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. 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 Atos.
How Atos's Current Liabilities Impact Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Atos has total liabilities of €6.0b and total assets of €19b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Atos has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From Atos's ROCE
Atos's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Atos 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 Atos better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.