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Should You Worry About Delfingen Industry S.A.’s (EPA:ALDEL) ROCE?

Today we are going to look at Delfingen Industry S.A. (EPA:ALDEL) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

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 Delfingen Industry:

0.09 = €12m ÷ (€198m - €61m) (Based on the trailing twelve months to June 2019.)

Therefore, Delfingen Industry has an ROCE of 9.0%.

View our latest analysis for Delfingen Industry

Is Delfingen Industry's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Delfingen Industry's ROCE appears to be significantly below the 12% average in the Auto Components industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Delfingen Industry compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Delfingen Industry's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTPA:ALDEL Past Revenue and Net Income, February 27th 2020
ENXTPA:ALDEL Past Revenue and Net Income, February 27th 2020

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Delfingen Industry has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Delfingen Industry's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Delfingen Industry has current liabilities of €61m and total assets of €198m. As a result, its current liabilities are equal to approximately 31% of its total assets. Delfingen Industry has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Delfingen Industry's ROCE

Delfingen Industry's ROCE does look good, but the level of current liabilities also contribute to that. Delfingen Industry looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Delfingen Industry 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.