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Are B&C Speakers S.p.A.’s (BIT:BEC) High Returns Really That Great?

Simply Wall St

Today we are going to look at B&C Speakers S.p.A. (BIT:BEC) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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. 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'.

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 B&C Speakers:

0.26 = €9.3m ÷ (€53m - €18m) (Based on the trailing twelve months to June 2019.)

So, B&C Speakers has an ROCE of 26%.

Check out our latest analysis for B&C Speakers

Is B&C Speakers's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that B&C Speakers's ROCE is meaningfully better than the 12% average in the Consumer Durables industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, B&C Speakers's ROCE in absolute terms currently looks quite high.

We can see that, B&C Speakers currently has an ROCE of 26%, less than the 38% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how B&C Speakers's ROCE compares to its industry. Click to see more on past growth.

BIT:BEC Past Revenue and Net Income, November 17th 2019

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for B&C Speakers.

What Are Current Liabilities, And How Do They Affect B&C Speakers's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

B&C Speakers has total assets of €53m and current liabilities of €18m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. B&C Speakers has a medium level of current liabilities, boosting its ROCE somewhat.

Our Take On B&C Speakers's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. B&C Speakers 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.

I will like B&C Speakers 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 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.