Today we’ll look at Christie Group plc (LON:CTG) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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 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. 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 Christie Group:
0.19 = UK£3.3m ÷ (UK£37m – UK£19m) (Based on the trailing twelve months to June 2019.)
So, Christie Group has an ROCE of 19%.
Does Christie Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Christie Group’s ROCE is meaningfully higher than the 15% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Christie Group’s ROCE in absolute terms currently looks quite high.
In our analysis, Christie Group’s ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 8.8%. This makes us wonder if the company is improving. You can see in the image below how Christie Group’s ROCE compares to its industry. Click to see more on past growth.
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. ROCE is only a point-in-time measure. If Christie Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Christie Group’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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Christie Group has total assets of UK£37m and current liabilities of UK£19m. Therefore its current liabilities are equivalent to approximately 52% of its total assets. While a high level of current liabilities boosts its ROCE, Christie Group’s returns are still very good.
What We Can Learn From Christie Group’s ROCE
So to us, the company is potentially worth investigating further. Christie Group 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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