Today we’ll look at Iceland Seafood International hf. (ICE:ICESEA) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Iceland Seafood International hf:
0.14 = €13m ÷ (€239m – €145m) (Based on the trailing twelve months to March 2020.)
So, Iceland Seafood International hf has an ROCE of 14%.
Does Iceland Seafood International hf Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Iceland Seafood International hf’s ROCE is meaningfully better than the 9.2% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Iceland Seafood International hf’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Iceland Seafood International hf’s current ROCE of 14% is lower than its ROCE in the past, which was 24%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Iceland Seafood International hf’s ROCE compares to its industry. Click to see more on past growth.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Iceland Seafood International hf has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Iceland Seafood International hf’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Iceland Seafood International hf has total assets of €239m and current liabilities of €145m. Therefore its current liabilities are equivalent to approximately 61% of its total assets. Iceland Seafood International hf’s current liabilities are fairly high, which increases its ROCE significantly.
What We Can Learn From Iceland Seafood International hf’s ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Iceland Seafood International hf out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Iceland Seafood International hf better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.