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Does Cogeco Communications Inc.’s (TSE:CCA) ROCE Reflect Well On The Business?

Simply Wall St

Today we'll look at Cogeco Communications Inc. (TSE:CCA) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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'.

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 Cogeco Communications:

0.091 = CA$596m ÷ (CA$6.9b - CA$312m) (Based on the trailing twelve months to May 2019.)

So, Cogeco Communications has an ROCE of 9.1%.

View our latest analysis for Cogeco Communications

Does Cogeco Communications Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Cogeco Communications's ROCE is around the 9.2% average reported by the Media industry. Separate from how Cogeco Communications 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.

You can click on the image below to see (in greater detail) how Cogeco Communications's past growth compares to other companies.

TSX:CCA Past Revenue and Net Income, September 24th 2019

It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Cogeco Communications.

Cogeco Communications's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Cogeco Communications has total assets of CA$6.9b and current liabilities of CA$312m. As a result, its current liabilities are equal to approximately 4.5% of its total assets. Cogeco Communications has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

The Bottom Line On Cogeco Communications's ROCE

If performance improves, then Cogeco Communications may be an OK investment, especially at the right valuation. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.