Today we'll look at Facephi Biometria, S.A. (BME:FACE) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Facephi Biometria:
0.26 = €849k ÷ (€6.6m - €3.3m) (Based on the trailing twelve months to December 2018.)
Therefore, Facephi Biometria has an ROCE of 26%.
See our latest analysis for Facephi Biometria
Does Facephi Biometria Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Facephi Biometria's ROCE is meaningfully higher than the 11% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Facephi Biometria's ROCE currently appears to be excellent.
Facephi Biometria has an ROCE of 26%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. Take a look at the image below to see how Facephi Biometria's past growth compares to the average in its industry.
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. ROCE is, after all, simply a snap shot of a single year. You can check if Facephi Biometria has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Facephi Biometria's Current Liabilities Skew 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Facephi Biometria has total liabilities of €3.3m and total assets of €6.6m. As a result, its current liabilities are equal to approximately 51% of its total assets. While a high level of current liabilities boosts its ROCE, Facephi Biometria's returns are still very good.
Our Take On Facephi Biometria's ROCE
In my book, this business could be worthy of further research. Facephi Biometria shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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