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Here’s What BigBen Interactive’s (EPA:BIG) Return On Capital Can Tell Us

Simply Wall St

Today we'll evaluate BigBen Interactive (EPA:BIG) to determine whether it could have potential as an investment idea. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

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 BigBen Interactive:

0.097 = €20m ÷ (€292m - €87m) (Based on the trailing twelve months to March 2019.)

So, BigBen Interactive has an ROCE of 9.7%.

See our latest analysis for BigBen Interactive

Is BigBen Interactive's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that BigBen Interactive's ROCE is fairly close to the Consumer Durables industry average of 9.7%. Regardless of where BigBen Interactive sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that BigBen Interactive currently has an ROCE of 9.7%, compared to its ROCE of 5.7% 3 years ago. This makes us wonder if the company is improving. The image below shows how BigBen Interactive's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ENXTPA:BIG Past Revenue and Net Income, October 21st 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BigBen Interactive.

How BigBen Interactive's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

BigBen Interactive has total assets of €292m and current liabilities of €87m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From BigBen Interactive's ROCE

With that in mind, BigBen Interactive's ROCE appears pretty good. BigBen Interactive 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.