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A Close Look At Croma Security Solutions Group PLC’s (LON:CSSG) 17% ROCE

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Today we'll look at Croma Security Solutions Group PLC (LON:CSSG) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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.'

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 Croma Security Solutions Group:

0.17 = UK£2.0m ÷ (UK£18m - UK£6.2m) (Based on the trailing twelve months to December 2018.)

So, Croma Security Solutions Group has an ROCE of 17%.

See our latest analysis for Croma Security Solutions Group

Is Croma Security Solutions Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Croma Security Solutions Group's ROCE is meaningfully better than the 12% average in the Electronic industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Croma Security Solutions Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that Croma Security Solutions Group currently has an ROCE of 17%, compared to its ROCE of 0.6% 3 years ago. This makes us think the business might be improving. You can see in the image below how Croma Security Solutions Group's ROCE compares to its industry. Click to see more on past growth.

AIM:CSSG Past Revenue and Net Income, September 5th 2019
AIM:CSSG Past Revenue and Net Income, September 5th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Croma Security Solutions Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Croma Security Solutions Group's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Croma Security Solutions Group has total assets of UK£18m and current liabilities of UK£6.2m. As a result, its current liabilities are equal to approximately 34% of its total assets. Croma Security Solutions Group has a medium level of current liabilities, which would boost the ROCE.

Our Take On Croma Security Solutions Group's ROCE

Croma Security Solutions Group's ROCE does look good, but the level of current liabilities also contribute to that. Croma Security Solutions Group 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.