11 bit studios S.A. (WSE:11B) Earns Among The Best Returns In Its Industry

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Today we’ll evaluate 11 bit studios S.A. (WSE:11B) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 11 bit studios:

0.49 = zł54m ÷ (zł115m – zł7.0m) (Based on the trailing twelve months to March 2019.)

So, 11 bit studios has an ROCE of 49%.

Check out our latest analysis for 11 bit studios

Is 11 bit studios’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that 11 bit studios’s ROCE is meaningfully better than the 30% average in the Entertainment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, 11 bit studios’s ROCE currently appears to be excellent.

WSE:11B Past Revenue and Net Income, June 27th 2019
WSE:11B Past Revenue and Net Income, June 27th 2019

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for 11 bit studios.

What Are Current Liabilities, And How Do They Affect 11 bit studios’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.

11 bit studios has total assets of zł115m and current liabilities of zł7.0m. Therefore its current liabilities are equivalent to approximately 6.0% of its total assets. 11 bit studios has low current liabilities, which have a negligible impact on its relatively good ROCE.

Our Take On 11 bit studios’s ROCE

This is an attractive combination and suggests the company could have potential. 11 bit studios looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.