Today we'll look at Stingray Group Inc. (TSE:RAY.A) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, ROCE is a useful tool, but it is not without drawbacks. 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'.
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 Stingray Group:
0.074 = CA$7.4m ÷ (CA$389m - CA$195m) (Based on the trailing twelve months to September 2018.)
Therefore, Stingray Group has an ROCE of 7.4%.
Does Stingray Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Stingray Group's ROCE is fairly close to the Media industry average of 8.4%. Aside from the industry comparison, Stingray Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our freereport on analyst forecasts for Stingray Group.
What Are Current Liabilities, And How Do They Affect Stingray Group's 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.
Stingray Group has total liabilities of CA$195m and total assets of CA$389m. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Stingray Group's current liabilities are fairly high, making its ROCE look better than otherwise.
Our Take On Stingray Group's ROCE
Even so, the company reports a mediocre ROCE, and there may be better investments out there. The ROCE can give us an idea of the quality of a business, but we need to look deeper if we are considering a purchase. For example you might check if insiders are buying shares.
If you would prefer check out another company -- one with potentially superior financials -- then do not miss thisfree list of interesting companies, that have HIGH return on equity and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.