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Today we’ll look at Next Fifteen Communications Group plc (LON:NFC) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.’
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 Next Fifteen Communications Group:
0.17 = UK£22m ÷ (UK£217m – UK£69m) (Based on the trailing twelve months to July 2018.)
So, Next Fifteen Communications Group has an ROCE of 17%.
Is Next Fifteen Communications Group’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Next Fifteen Communications Group’s ROCE is meaningfully higher than the 9.0% average in the Media industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Next Fifteen Communications Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Next Fifteen Communications Group’s Current Liabilities Skew Its 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 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.
Next Fifteen Communications Group has total assets of UK£217m and current liabilities of UK£69m. As a result, its current liabilities are equal to approximately 32% of its total assets. Next Fifteen Communications Group has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Next Fifteen Communications Group’s ROCE
Next Fifteen Communications Group’s ROCE does look good, but the level of current liabilities also contribute to that. Of course you might be able to find a better stock than Next Fifteen Communications Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.