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Examining Alfio Bardolla Training Group S.p.A.’s (BIT:ABTG) Weak Return On Capital Employed

Simply Wall St

Today we are going to look at Alfio Bardolla Training Group S.p.A. (BIT:ABTG) to see whether it might be an attractive investment prospect. 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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?

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 Alfio Bardolla Training Group:

0.022 = €175k ÷ (€9.6m - €1.8m) (Based on the trailing twelve months to June 2018.)

So, Alfio Bardolla Training Group has an ROCE of 2.2%.

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Is Alfio Bardolla Training Group's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Alfio Bardolla Training Group's ROCE appears meaningfully below the 11% average reported by the Consumer Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Alfio Bardolla Training Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. Readers may wish to look for more rewarding investments.

BIT:ABTG Past Revenue and Net Income, May 26th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Alfio Bardolla Training Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Alfio Bardolla Training Group's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Alfio Bardolla Training Group has total liabilities of €1.8m and total assets of €9.6m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From Alfio Bardolla Training Group's ROCE

While that is good to see, Alfio Bardolla Training Group has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Alfio Bardolla Training Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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

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.