What Can We Make Of Atresmedia Corporación de Medios de Comunicación, S.A.’s (BME:A3M) High Return On Capital?
Today we'll look at Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Atresmedia Corporación de Medios de Comunicación:
0.22 = €171m ÷ (€1.3b - €507m) (Based on the trailing twelve months to June 2019.)
Therefore, Atresmedia Corporación de Medios de Comunicación has an ROCE of 22%.
View our latest analysis for Atresmedia Corporación de Medios de Comunicación
Is Atresmedia Corporación de Medios de Comunicación's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Atresmedia Corporación de Medios de Comunicación'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. Regardless of the industry comparison, in absolute terms, Atresmedia Corporación de Medios de Comunicación's ROCE currently appears to be excellent.
The image below shows how Atresmedia Corporación de Medios de Comunicación's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Atresmedia Corporación de Medios de Comunicación.
How Atresmedia Corporación de Medios de Comunicación's Current Liabilities Impact 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Atresmedia Corporación de Medios de Comunicación has total assets of €1.3b and current liabilities of €507m. As a result, its current liabilities are equal to approximately 39% of its total assets. A medium level of current liabilities boosts Atresmedia Corporación de Medios de Comunicación's ROCE somewhat.
The Bottom Line On Atresmedia Corporación de Medios de Comunicación's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Atresmedia Corporación de Medios de Comunicación 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.
