Yahoo Finance Why You Should Care About Sligro Food Group N.V.’s (AMS:SLIGR) Low Return On Capital
Today we'll evaluate Sligro Food Group N.V. (AMS:SLIGR) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.
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 Sligro Food Group:
0.039 = €34m ÷ (€1.5b - €593m) (Based on the trailing twelve months to December 2019.)
Therefore, Sligro Food Group has an ROCE of 3.9%.
See our latest analysis for Sligro Food Group
Is Sligro Food Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Sligro Food Group's ROCE appears meaningfully below the 8.9% average reported by the Consumer Retailing industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Sligro Food Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Sligro Food Group's current ROCE of 3.9% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently. The image below shows how Sligro Food Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Sligro Food Group.
How Sligro Food 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. 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.
Sligro Food Group has current liabilities of €593m and total assets of €1.5b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. Sligro Food Group has a medium level of current liabilities, which would boost its ROCE somewhat.
Our Take On Sligro Food Group's ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Sligro Food Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Sligro Food Group 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.
