Today we'll evaluate Remedy Entertainment Oyj (HEL:REMEDY) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Remedy Entertainment Oyj:
0.097 = €2.5m ÷ (€30m - €5.2m) (Based on the trailing twelve months to June 2019.)
So, Remedy Entertainment Oyj has an ROCE of 9.7%.
Is Remedy Entertainment Oyj's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Remedy Entertainment Oyj's ROCE is around the 11% average reported by the Entertainment industry. Independently of how Remedy Entertainment Oyj compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Remedy Entertainment Oyj's current ROCE of 9.7% is lower than its ROCE in the past, which was 35%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Remedy Entertainment Oyj's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. 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 Remedy Entertainment Oyj.
How Remedy Entertainment Oyj's Current Liabilities Impact Its 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.
Remedy Entertainment Oyj has total assets of €30m and current liabilities of €5.2m. As a result, its current liabilities are equal to approximately 17% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Remedy Entertainment Oyj's ROCE
With that in mind, Remedy Entertainment Oyj's ROCE appears pretty good. Remedy Entertainment Oyj 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 email@example.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.
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