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Is There More To Secuoya Grupo de Comunicación, S.L. (BME:SEC) Than Its 11% Returns On Capital?

Today we'll look at Secuoya Grupo de Comunicación, S.L. (BME:SEC) 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.

First of all, we'll work out how to 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 measures the amount of pre-tax profits a company can generate from the capital employed in its 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.'

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 Secuoya Grupo de Comunicación S.L:

0.11 = €4.1m ÷ (€62m - €26m) (Based on the trailing twelve months to June 2018.)

So, Secuoya Grupo de Comunicación S.L has an ROCE of 11%.

Check out our latest analysis for Secuoya Grupo de Comunicación S.L

Does Secuoya Grupo de Comunicación S.L Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Secuoya Grupo de Comunicación S.L's ROCE appears to be around the 9.7% average of the Media industry. Independently of how Secuoya Grupo de Comunicación S.L compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

As we can see, Secuoya Grupo de Comunicación S.L currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 8.2%. This makes us think about whether the company has been reinvesting shrewdly.

BME:SEC Past Revenue and Net Income, April 25th 2019
BME:SEC Past Revenue and Net Income, April 25th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. If Secuoya Grupo de Comunicación S.L is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Secuoya Grupo de Comunicación S.L's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Secuoya Grupo de Comunicación S.L has total liabilities of €26m and total assets of €62m. Therefore its current liabilities are equivalent to approximately 42% of its total assets. Secuoya Grupo de Comunicación S.L has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Secuoya Grupo de Comunicación S.L's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Secuoya Grupo de Comunicación S.L looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.

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