Today we are going to look at Poligrafica S. Faustino S.p.A. (BIT:PSF) to see whether it might be an attractive investment prospect. 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. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Poligrafica S. Faustino:
0.094 = €1.6m ÷ (€41m – €24m) (Based on the trailing twelve months to September 2019.)
Therefore, Poligrafica S. Faustino has an ROCE of 9.4%.
Does Poligrafica S. Faustino Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Poligrafica S. Faustino’s ROCE is fairly close to the Commercial Services industry average of 9.2%. Regardless of where Poligrafica S. Faustino sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Poligrafica S. Faustino’s ROCE appears to be 9.4%, compared to 3 years ago, when its ROCE was 5.2%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Poligrafica S. Faustino’s past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Poligrafica S. Faustino.
How Poligrafica S. Faustino’s Current Liabilities Impact Its 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.
Poligrafica S. Faustino has total assets of €41m and current liabilities of €24m. Therefore its current liabilities are equivalent to approximately 58% of its total assets. Poligrafica S. Faustino has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On Poligrafica S. Faustino’s ROCE
While its ROCE looks decent, it wouldn’t look so good if it reduced current liabilities. Poligrafica S. Faustino 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 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 firstname.lastname@example.org. 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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