Do Grupa Kapitalowa IMMOBILE S.A.’s (WSE:GKI) Returns On Capital Employed Make The Cut?

Today we are going to look at Grupa Kapitalowa IMMOBILE S.A. (WSE:GKI) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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.

Understanding 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

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 Grupa Kapitalowa IMMOBILE:

0.092 = zł28m ÷ (zł444m – zł142m) (Based on the trailing twelve months to September 2018.)

So, Grupa Kapitalowa IMMOBILE has an ROCE of 9.2%.

Check out our latest analysis for Grupa Kapitalowa IMMOBILE

Does Grupa Kapitalowa IMMOBILE Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Grupa Kapitalowa IMMOBILE’s ROCE is around the 8.3% average reported by the Industrials industry. Setting aside the industry comparison for now, Grupa Kapitalowa IMMOBILE’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

In our analysis, Grupa Kapitalowa IMMOBILE’s ROCE appears to be 9.2%, compared to 3 years ago, when its ROCE was 2.6%. This makes us wonder if the company is improving.

WSE:GKI Past Revenue and Net Income, April 3rd 2019
WSE:GKI Past Revenue and Net Income, April 3rd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. You can check if Grupa Kapitalowa IMMOBILE has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Grupa Kapitalowa IMMOBILE’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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Grupa Kapitalowa IMMOBILE has total liabilities of zł142m and total assets of zł444m. As a result, its current liabilities are equal to approximately 32% of its total assets. Grupa Kapitalowa IMMOBILE’s middling level of current liabilities have the effect of boosting its ROCE a bit.

What We Can Learn From Grupa Kapitalowa IMMOBILE’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. But note: Grupa Kapitalowa IMMOBILE may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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