Today we'll look at Kiriacoulis Mediterranean Cruises Shipping S.A. (ATH:KYRI) and reflect on its potential as an investment. 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 Kiriacoulis Mediterranean Cruises Shipping:
0.028 = €1.1m ÷ (€52m - €13m) (Based on the trailing twelve months to December 2018.)
Therefore, Kiriacoulis Mediterranean Cruises Shipping has an ROCE of 2.8%.
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Is Kiriacoulis Mediterranean Cruises Shipping's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Kiriacoulis Mediterranean Cruises Shipping's ROCE appears to be significantly below the 8.7% average in the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Kiriacoulis Mediterranean Cruises Shipping 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.
Our data shows that Kiriacoulis Mediterranean Cruises Shipping currently has an ROCE of 2.8%, compared to its ROCE of 0.06% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. How cyclical is Kiriacoulis Mediterranean Cruises Shipping? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Kiriacoulis Mediterranean Cruises Shipping's Current Liabilities Skew 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Kiriacoulis Mediterranean Cruises Shipping has total assets of €52m and current liabilities of €13m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Kiriacoulis Mediterranean Cruises Shipping's ROCE
That's not a bad thing, however Kiriacoulis Mediterranean Cruises Shipping has a weak ROCE and may not be an attractive investment. You might be able to find a better investment than Kiriacoulis Mediterranean Cruises Shipping. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 email@example.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.