Scientific Brain Training SA (EPA:MLSBT) Might Not Be A Great Investment

Today we'll evaluate Scientific Brain Training SA (EPA:MLSBT) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?

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 Scientific Brain Training:

0.055 = €599k ÷ (€12m - €970k) (Based on the trailing twelve months to December 2017.)

So, Scientific Brain Training has an ROCE of 5.5%.

Check out our latest analysis for Scientific Brain Training

Does Scientific Brain Training Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Scientific Brain Training's ROCE appears to be significantly below the 9.2% average in the Healthcare Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Scientific Brain Training stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Our data shows that Scientific Brain Training currently has an ROCE of 5.5%, compared to its ROCE of 2.4% 3 years ago. This makes us wonder if the company is improving.

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. If Scientific Brain Training is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.

Do Scientific Brain Training's Current Liabilities Skew Its 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Scientific Brain Training has total liabilities of €970k and total assets of €12m. As a result, its current liabilities are equal to approximately 8.2% of its total assets. Scientific Brain Training has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

The Bottom Line On Scientific Brain Training's ROCE

Based on this information, Scientific Brain Training appears to be a mediocre business. Of course you might be able to find a better stock than Scientific Brain Training. So you may wish to see this freecollection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this freelist 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.