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Why We Like Jerónimo Martins, SGPS, S.A.’s (ELI:JMT) 15% Return On Capital Employed

Today we are going to look at Jerónimo Martins, SGPS, S.A. (ELI:JMT) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Jerónimo Martins SGPS:

0.15 = €719m ÷ (€9.8b - €5.0b) (Based on the trailing twelve months to December 2019.)

So, Jerónimo Martins SGPS has an ROCE of 15%.

See our latest analysis for Jerónimo Martins SGPS

Does Jerónimo Martins SGPS Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Jerónimo Martins SGPS's ROCE is meaningfully better than the 9.4% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Jerónimo Martins SGPS sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Jerónimo Martins SGPS's current ROCE of 15% is lower than its ROCE in the past, which was 24%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Jerónimo Martins SGPS's past growth compares to other companies.

ENXTLS:JMT Past Revenue and Net Income April 10th 2020
ENXTLS:JMT Past Revenue and Net Income April 10th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Jerónimo Martins SGPS.

How Jerónimo Martins SGPS's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Jerónimo Martins SGPS has current liabilities of €5.0b and total assets of €9.8b. Therefore its current liabilities are equivalent to approximately 52% of its total assets. Jerónimo Martins SGPS's current liabilities are fairly high, which increases its ROCE significantly.

Our Take On Jerónimo Martins SGPS's ROCE

While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than Jerónimo Martins SGPS 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 Jerónimo Martins SGPS 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.