Yahoo Finance Why You Should Like Derichebourg’s (EPA:DBG) ROCE
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Today we'll look at Derichebourg (EPA:DBG) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Derichebourg:
0.15 = €112m ÷ (€1.4b - €658m) (Based on the trailing twelve months to September 2018.)
Therefore, Derichebourg has an ROCE of 15%.
Check out our latest analysis for Derichebourg
Does Derichebourg Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Derichebourg's ROCE is meaningfully better than the 8.4% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Derichebourg sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
As we can see, Derichebourg currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 8.8%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and 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 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.
How Derichebourg's Current Liabilities Impact 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.
Derichebourg has total assets of €1.4b and current liabilities of €658m. As a result, its current liabilities are equal to approximately 47% of its total assets. Derichebourg has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Derichebourg's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Of course you might be able to find a better stock than Derichebourg. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Derichebourg 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.
