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How Do CIBT Education Group Inc.’s (TSE:MBA) Returns Compare To Its Industry?

Simply Wall St

Today we are going to look at CIBT Education Group Inc. (TSE:MBA) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is 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. 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.

So, How Do We Calculate ROCE?

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 CIBT Education Group:

0.012 = CA$3.8m ÷ (CA$390m - CA$82m) (Based on the trailing twelve months to August 2019.)

Therefore, CIBT Education Group has an ROCE of 1.2%.

View our latest analysis for CIBT Education Group

Does CIBT Education Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see CIBT Education Group's ROCE is meaningfully below the Consumer Services industry average of 7.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how CIBT Education Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.4% available in government bonds. There are potentially more appealing investments elsewhere.

CIBT Education Group delivered an ROCE of 1.2%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how CIBT Education Group's ROCE compares to its industry. Click to see more on past growth.

TSX:MBA Past Revenue and Net Income, January 4th 2020

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. 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.

Do CIBT Education Group's Current Liabilities Skew 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

CIBT Education Group has total assets of CA$390m and current liabilities of CA$82m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On CIBT Education Group's ROCE

CIBT Education Group has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than CIBT Education Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.