Today we’ll look at F.I.L.A. – Fabbrica Italiana Lapis ed Affini S.p.A. (BIT:FILA) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. 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. 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?
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 F.I.L.A. – Fabbrica Italiana Lapis ed Affini:
0.072 = €68m ÷ (€1.2b – €233m) (Based on the trailing twelve months to March 2019.)
So, F.I.L.A. – Fabbrica Italiana Lapis ed Affini has an ROCE of 7.2%.
Does F.I.L.A. – Fabbrica Italiana Lapis ed Affini Have A Good ROCE?
One way to assess ROCE is to compare similar companies. F.I.L.A. – Fabbrica Italiana Lapis ed Affini’s ROCE appears to be substantially greater than the 5.0% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from how F.I.L.A. – Fabbrica Italiana Lapis ed Affini stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
We can see that , F.I.L.A. – Fabbrica Italiana Lapis ed Affini currently has an ROCE of 7.2%, less than the 12% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
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. 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 F.I.L.A. – Fabbrica Italiana Lapis ed Affini.
Do F.I.L.A. – Fabbrica Italiana Lapis ed Affini’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
F.I.L.A. – Fabbrica Italiana Lapis ed Affini has total liabilities of €233m and total assets of €1.2b. Therefore its current liabilities are equivalent to approximately 20% 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 F.I.L.A. – Fabbrica Italiana Lapis ed Affini’s ROCE
With that in mind, we’re not overly impressed with F.I.L.A. – Fabbrica Italiana Lapis ed Affini’s ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than F.I.L.A. – Fabbrica Italiana Lapis ed Affini. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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.