Yahoo Finance Is eDreams ODIGEO S.A. (BME:EDR) Better Than Average At Deploying Capital?
Today we'll look at eDreams ODIGEO S.A. (BME:EDR) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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.
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 eDreams ODIGEO:
0.11 = €98m ÷ (€1.2b - €322m) (Based on the trailing twelve months to September 2019.)
Therefore, eDreams ODIGEO has an ROCE of 11%.
View our latest analysis for eDreams ODIGEO
Does eDreams ODIGEO Have A Good ROCE?
One way to assess ROCE is to compare similar companies. eDreams ODIGEO's ROCE appears to be substantially greater than the 8.6% average in the Online Retail 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 eDreams ODIGEO compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how eDreams ODIGEO's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for eDreams ODIGEO.
What Are Current Liabilities, And How Do They Affect eDreams ODIGEO's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
eDreams ODIGEO has total liabilities of €322m and total assets of €1.2b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From eDreams ODIGEO's ROCE
Overall, eDreams ODIGEO has a decent ROCE and could be worthy of further research. eDreams ODIGEO 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.
