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Today we’ll look at Avenir Telecom S.A. (

EPA:AVT

) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Avenir Telecom:

0.20 = €2.0m ÷ (€37m – €23m) (Based on the trailing twelve months to September 2018.)

Therefore,

Avenir Telecom has an ROCE of 20%.

View our latest analysis for Avenir Telecom

Is Avenir Telecom’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Avenir Telecom’s ROCE appears to be substantially greater than the 7.8% average in the Specialty 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. Putting aside its position relative to its industry for now, in absolute terms, Avenir Telecom’s ROCE is currently very good.

ENXTPA:AVT Last Perf February 1st 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. You can check if Avenir Telecom 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 Avenir Telecom’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 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.

Story continues

Avenir Telecom has total liabilities of €23m and total assets of €37m. Therefore its current liabilities are equivalent to approximately 61% of its total assets. Avenir Telecom boasts an attractive ROCE, even after considering the boost from high current liabilities.

What We Can Learn From Avenir Telecom’s ROCE

In my book, this business could be worthy of further research. Of course

you might be able to find a better stock than Avenir Telecom

. So you may wish to see this

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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