Today we'll evaluate Public Joint Stock Company "Rollman Group" (MCX:RLMN) to determine whether it could have potential as an investment idea. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Rollman Group:
0.087 = ₽57m ÷ (₽1.0b - ₽350m) (Based on the trailing twelve months to June 2019.)
So, Rollman Group has an ROCE of 8.7%.
Is Rollman Group's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Rollman Group's ROCE is meaningfully below the Chemicals industry average of 20%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Rollman Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
You can click on the image below to see (in greater detail) how Rollman Group's past growth compares to other companies.
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. How cyclical is Rollman Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Rollman Group's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Rollman Group has total assets of ₽1.0b and current liabilities of ₽350m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Rollman Group's ROCE is concerning.
What We Can Learn From Rollman Group's ROCE
So researching other companies may be a better use of your time. 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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