Yahoo Finance Why You Should Like Umicore SA’s (EBR:UMI) ROCE
Today we are going to look at Umicore SA (EBR:UMI) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Umicore:
0.12 = €477m ÷ (€6.2b - €2.3b) (Based on the trailing twelve months to June 2019.)
So, Umicore has an ROCE of 12%.
View our latest analysis for Umicore
Is Umicore's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Umicore's ROCE appears to be substantially greater than the 8.2% average in the Chemicals industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Umicore compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Umicore's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Umicore.
What Are Current Liabilities, And How Do They Affect Umicore's 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Umicore has total liabilities of €2.3b and total assets of €6.2b. Therefore its current liabilities are equivalent to approximately 37% of its total assets. With this level of current liabilities, Umicore's ROCE is boosted somewhat.
The Bottom Line On Umicore's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Umicore shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
