Is ProSiebenSat.1 Media SE’s (ETR:PSM) 11% ROCE Any Good?
Today we are going to look at ProSiebenSat.1 Media SE (ETR:PSM) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 ProSiebenSat.1 Media:
0.11 = €551m ÷ (€6.4b - €1.3b) (Based on the trailing twelve months to September 2019.)
Therefore, ProSiebenSat.1 Media has an ROCE of 11%.
View our latest analysis for ProSiebenSat.1 Media
Does ProSiebenSat.1 Media Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, ProSiebenSat.1 Media's ROCE is meaningfully higher than the 7.9% 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 ProSiebenSat.1 Media sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
ProSiebenSat.1 Media's current ROCE of 11% is lower than its ROCE in the past, which was 21%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how ProSiebenSat.1 Media's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do ProSiebenSat.1 Media's Current Liabilities Skew 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
ProSiebenSat.1 Media has total assets of €6.4b and current liabilities of €1.3b. Therefore its current liabilities are equivalent to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On ProSiebenSat.1 Media's ROCE
This is good to see, and with a sound ROCE, ProSiebenSat.1 Media could be worth a closer look. ProSiebenSat.1 Media 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
