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Are Alma Media Oyj’s (HEL:ALMA) High Returns Really That Great?

Simply Wall St

Today we'll evaluate Alma Media Oyj (HEL:ALMA) 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 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.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from 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.

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 Alma Media Oyj:

0.21 = €61m ÷ (€388m - €99m) (Based on the trailing twelve months to September 2019.)

So, Alma Media Oyj has an ROCE of 21%.

See our latest analysis for Alma Media Oyj

Is Alma Media Oyj's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Alma Media Oyj's ROCE is meaningfully better than the 10% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Alma Media Oyj's ROCE is currently very good.

In our analysis, Alma Media Oyj's ROCE appears to be 21%, compared to 3 years ago, when its ROCE was 11%. This makes us wonder if the company is improving. The image below shows how Alma Media Oyj's ROCE compares to its industry, and you can click it to see more detail on its past growth.

HLSE:ALMA Past Revenue and Net Income, January 21st 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Alma Media Oyj's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Alma Media Oyj has total liabilities of €99m and total assets of €388m. As a result, its current liabilities are equal to approximately 25% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

Our Take On Alma Media Oyj's ROCE

With low current liabilities and a high ROCE, Alma Media Oyj could be worthy of further investigation. Alma Media Oyj shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.