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Why We’re Not Keen On JCDecaux SA’s (EPA:DEC) 5.7% Return On Capital

Simply Wall St

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Today we'll evaluate JCDecaux SA ( EPA:DEC ) to determine whether it could have potential as an investment idea. 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.

Firstly, 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.

Understanding 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.'

So, How Do We Calculate ROCE?

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 JCDecaux:

0.057 = €235m ÷ (€5.8b - €1.6b) (Based on the trailing twelve months to December 2018.)

Therefore, JCDecaux has an ROCE of 5.7%.

Check out our latest analysis for JCDecaux

Does JCDecaux Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see JCDecaux's ROCE is meaningfully below the Media industry average of 9.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, JCDecaux'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.

We can see that , JCDecaux currently has an ROCE of 5.7%, less than the 8.6% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how JCDecaux's past growth compares to other companies.

ENXTPA:DEC Past Revenue and Net Income, July 15th 2019

It is important to remember that ROCE shows past performance, and is 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 JCDecaux .

What Are Current Liabilities, And How Do They Affect JCDecaux's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

JCDecaux has total liabilities of €1.6b and total assets of €5.8b. As a result, its current liabilities are equal to approximately 28% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On JCDecaux's ROCE

That said, JCDecaux's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.