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How Good Is Kambi Group plc (STO:KAMBI) At Creating Shareholder Value?

Simply Wall St

Today we'll evaluate Kambi Group plc (STO:KAMBI) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Kambi Group:

0.17 = €13m ÷ (€94m - €16m) (Based on the trailing twelve months to September 2019.)

So, Kambi Group has an ROCE of 17%.

Check out our latest analysis for Kambi Group

Is Kambi Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Kambi Group's ROCE is around the 17% average reported by the Hospitality industry. Regardless of where Kambi Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Kambi Group's current ROCE of 17% is lower than its ROCE in the past, which was 23%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Kambi Group's ROCE compares to its industry. Click to see more on past growth.

OM:KAMBI Past Revenue and Net Income, November 18th 2019

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kambi Group.

Do Kambi Group's Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Kambi Group has total assets of €94m and current liabilities of €16m. As a result, its current liabilities are equal to approximately 17% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Kambi Group's ROCE

Overall, Kambi Group has a decent ROCE and could be worthy of further research. Kambi Group 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 Kambi 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.