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Does Immsi S.p.A. (BIT:IMS) Create Value For Shareholders?

Simply Wall St

Today we'll look at Immsi S.p.A. (BIT:IMS) 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.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Immsi:

0.10 = €110m ÷ (€2.2b - €1.1b) (Based on the trailing twelve months to September 2019.)

So, Immsi has an ROCE of 10%.

Check out our latest analysis for Immsi

Is Immsi's ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that Immsi's ROCE is fairly close to the Auto industry average of 9.6%. Separate from Immsi's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that, Immsi currently has an ROCE of 10% compared to its ROCE 3 years ago, which was 4.7%. This makes us wonder if the company is improving. You can see in the image below how Immsi's ROCE compares to its industry. Click to see more on past growth.

BIT:IMS Past Revenue and Net Income, December 13th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. How cyclical is Immsi? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Immsi's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Immsi has total assets of €2.2b and current liabilities of €1.1b. As a result, its current liabilities are equal to approximately 51% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.

The Bottom Line On Immsi's ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. Immsi 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.

I will like Immsi better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.