Today we'll evaluate RTL Group SA (ETR:RRTL) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 RTL Group:
0.21 = €1.1b ÷ (€8.3b - €3.3b) (Based on the trailing twelve months to June 2019.)
So, RTL Group has an ROCE of 21%.
Does RTL Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. RTL Group's ROCE appears to be substantially greater than the 9.4% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, RTL Group's ROCE currently appears to be excellent.
You can see in the image below how RTL Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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.
How RTL Group's Current Liabilities Impact 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. 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.
RTL Group has total liabilities of €3.3b and total assets of €8.3b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. RTL Group's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From RTL Group's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than RTL Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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