Today we are going to look at Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) 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.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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?
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 Atresmedia Corporación de Medios de Comunicación:
0.22 = €169m ÷ (€1.4b – €593m) (Based on the trailing twelve months to December 2018.)
Therefore, Atresmedia Corporación de Medios de Comunicación has an ROCE of 22%.
Is Atresmedia Corporación de Medios de Comunicación’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Atresmedia Corporación de Medios de Comunicación’s ROCE is meaningfully higher than the 9.6% average in the Media industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Atresmedia Corporación de Medios de Comunicación’s ROCE in absolute terms currently looks quite high.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Atresmedia Corporación de Medios de Comunicación.
How Atresmedia Corporación de Medios de Comunicación’s Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.
Atresmedia Corporación de Medios de Comunicación has total liabilities of €593m and total assets of €1.4b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. A medium level of current liabilities boosts Atresmedia Corporación de Medios de Comunicación’s ROCE somewhat.
The Bottom Line On Atresmedia Corporación de Medios de Comunicación’s ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Of course you might be able to find a better stock than Atresmedia Corporación de Medios de Comunicación. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.