Is SITI – B&T Group S.p.A. (BIT:SITI) Struggling With Its 3.4% Return On Capital Employed?

Today we’ll look at SITI – B&T Group S.p.A. (BIT:SITI) 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. 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 SITI – B&T Group:

0.034 = €4.4m ÷ (€254m – €124m) (Based on the trailing twelve months to June 2019.)

So, SITI – B&T Group has an ROCE of 3.4%.

View our latest analysis for SITI – B&T Group

Does SITI – B&T Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, SITI – B&T Group’s ROCE appears meaningfully below the 11% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside SITI – B&T Group’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

SITI – B&T Group’s current ROCE of 3.4% is lower than its ROCE in the past, which was 8.2%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how SITI – B&T Group’s ROCE compares to its industry.

BIT:SITI Past Revenue and Net Income, October 23rd 2019
BIT:SITI Past Revenue and Net Income, October 23rd 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 SITI – B&T Group.

How SITI – B&T Group’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

SITI – B&T Group has total assets of €254m and current liabilities of €124m. Therefore its current liabilities are equivalent to approximately 49% of its total assets. SITI – B&T Group has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

The Bottom Line On SITI – B&T Group’s ROCE

There are likely better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.