Today we'll evaluate Gamesys Group plc (LON:GYS) to determine whether it could have potential as an investment idea. 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. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Gamesys Group:
0.055 = UK£59m ÷ (UK£1.2b - UK£123m) (Based on the trailing twelve months to December 2019.)
Therefore, Gamesys Group has an ROCE of 5.5%.
Check out our latest analysis for Gamesys Group
Is Gamesys Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Gamesys Group's ROCE is meaningfully below the Hospitality industry average of 6.9%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Gamesys Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how Gamesys Group's past growth compares to other companies.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Gamesys Group.
What Are Current Liabilities, And How Do They Affect Gamesys 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Gamesys Group has current liabilities of UK£123m and total assets of UK£1.2b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
The Bottom Line On Gamesys Group's ROCE
With that in mind, we're not overly impressed with Gamesys Group's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Gamesys Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
Gamesys Group is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
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