Why SA Cecurity.com’s (EPA:MLCEC) Return On Capital Employed Looks Uninspiring

Today we are going to look at SA Cecurity.com (EPA:MLCEC) 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. 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.

What is 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. In general, businesses with a higher ROCE are usually better quality. 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.

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 SA Cecurity.com:

0.015 = €67k ÷ (€7.7m – €3.1m) (Based on the trailing twelve months to December 2018.)

So, SA Cecurity.com has an ROCE of 1.5%.

View our latest analysis for SA Cecurity.com

Does SA Cecurity.com Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, SA Cecurity.com’s ROCE appears meaningfully below the 11% average reported by the Software industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how SA Cecurity.com compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.7% available in government bonds. It is likely that there are more attractive prospects out there.

You can click on the image below to see (in greater detail) how SA Cecurity.com’s past growth compares to other companies.

ENXTPA:MLCEC Past Revenue and Net Income, September 26th 2019
ENXTPA:MLCEC Past Revenue and Net Income, September 26th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If SA Cecurity.com is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How SA Cecurity.com’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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

SA Cecurity.com has total liabilities of €3.1m and total assets of €7.7m. Therefore its current liabilities are equivalent to approximately 40% of its total assets. With a medium level of current liabilities boosting the ROCE a little, SA Cecurity.com’s low ROCE is unappealing.

The Bottom Line On SA Cecurity.com’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.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.