Today we are going to look at Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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:
0.21 = €170m ÷ (€1.3b - €470m) (Based on the trailing twelve months to September 2019.)
Therefore, Atresmedia Corporación de Medios de Comunicación has an ROCE of 21%.
Does Atresmedia Corporación de Medios de Comunicación Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Atresmedia Corporación de Medios de Comunicación's ROCE is meaningfully better than the 10.0% average in the Media 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, Atresmedia Corporación de Medios de Comunicación's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Atresmedia Corporación de Medios de Comunicación's past growth compares to other companies.
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 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.
Atresmedia Corporación de Medios de Comunicación's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Atresmedia Corporación de Medios de Comunicación has current liabilities of €470m and total assets of €1.3b. As a result, its current liabilities are equal to approximately 37% of its total assets. Atresmedia Corporación de Medios de Comunicación's ROCE is boosted somewhat by its middling amount of current liabilities.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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