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Today we’ll evaluate Izolacja Jarocin Spolka Akcyjna (WSE:IZO) 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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’.
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 Izolacja Jarocin Spolka Akcyjna:
0.081 = zł2.2m ÷ (zł20m – zł7.3m) (Based on the trailing twelve months to September 2018.)
So, Izolacja Jarocin Spolka Akcyjna has an ROCE of 8.1%.
Does Izolacja Jarocin Spolka Akcyjna Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Izolacja Jarocin Spolka Akcyjna’s ROCE is fairly close to the Basic Materials industry average of 8.1%. Setting aside the industry comparison for now, Izolacja Jarocin Spolka Akcyjna’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Izolacja Jarocin Spolka Akcyjna currently has an ROCE of 8.1%, compared to its ROCE of 5.8% 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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Izolacja Jarocin Spolka Akcyjna? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Izolacja Jarocin Spolka Akcyjna’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Izolacja Jarocin Spolka Akcyjna has total liabilities of zł7.3m and total assets of zł20m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. Izolacja Jarocin Spolka Akcyjna’s ROCE is improved somewhat by its moderate amount of current liabilities.
What We Can Learn From Izolacja Jarocin Spolka Akcyjna’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better buy than Izolacja Jarocin Spolka Akcyjna. 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).
I will like Izolacja Jarocin Spolka Akcyjna better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 email@example.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. On rare occasion, data errors may occur. Thank you for reading.