A Close Look At Pelatro Plc’s (LON:PTRO) 17% ROCE
Today we'll look at Pelatro Plc (LON:PTRO) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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. 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.'
So, How Do We Calculate ROCE?
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 Pelatro:
0.17 = US$2.9m ÷ (US$18m - US$1.2m) (Based on the trailing twelve months to December 2018.)
Therefore, Pelatro has an ROCE of 17%.
Check out our latest analysis for Pelatro
Is Pelatro's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Pelatro's ROCE is meaningfully higher than the 11% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Pelatro's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Pelatro reported an ROCE of 17% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. The image below shows how Pelatro's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pelatro.
How Pelatro'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Pelatro has total liabilities of US$1.2m and total assets of US$18m. Therefore its current liabilities are equivalent to approximately 6.7% of its total assets. Low current liabilities have only a minimal impact on Pelatro's ROCE, making its decent returns more credible.
Our Take On Pelatro's ROCE
This is good to see, and while better prospects may exist, Pelatro seems worth researching further. Pelatro 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.
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.
