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How Good Is Iniziative Bresciane S.p.A. (BIT:IB) At Creating Shareholder Value?

Simply Wall St

Today we are going to look at Iniziative Bresciane S.p.A. (BIT:IB) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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'.

How Do You Calculate Return On Capital Employed?

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 Iniziative Bresciane:

0.053 = €5.1m ÷ (€125m - €29m) (Based on the trailing twelve months to June 2019.)

Therefore, Iniziative Bresciane has an ROCE of 5.3%.

Check out our latest analysis for Iniziative Bresciane

Is Iniziative Bresciane's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Iniziative Bresciane's ROCE is around the 5.3% average reported by the Renewable Energy industry. Separate from how Iniziative Bresciane 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.

The image below shows how Iniziative Bresciane's ROCE compares to its industry, and you can click it to see more detail on its past growth.

BIT:IB Past Revenue and Net Income, January 24th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Iniziative Bresciane.

What Are Current Liabilities, And How Do They Affect Iniziative Bresciane's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Iniziative Bresciane has total assets of €125m and current liabilities of €29m. As a result, its current liabilities are equal to approximately 23% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Iniziative Bresciane's ROCE

If Iniziative Bresciane continues to earn an uninspiring ROCE, there may be better places to invest. 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.

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.