Today we are going to look at Cairo Communication S.p.A. (BIT:CAI) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Cairo Communication:
0.097 = €102m ÷ (€1.4b – €133m) (Based on the trailing twelve months to September 2018.)
Therefore, Cairo Communication has an ROCE of 9.7%.
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Does Cairo Communication Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Cairo Communication’s ROCE is around the 9.7% average reported by the Media industry. Separate from how Cairo Communication stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
In our analysis, Cairo Communication’s ROCE appears to be 9.7%, compared to 3 years ago, when its ROCE was 5.6%. This makes us think about whether the company has been reinvesting shrewdly.
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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Cairo Communication.
Do Cairo Communication’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
Cairo Communication has total liabilities of €133m and total assets of €1.4b. As a result, its current liabilities are equal to approximately 9.8% of its total assets. Cairo Communication has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
What We Can Learn From Cairo Communication’s ROCE
Cairo Communication looks like an ok business, but on this analysis it is not at the top of our buy list. Of course you might be able to find a better stock than Cairo Communication. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Cairo Communication better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.