Today we are going to look at Solutions 30 S.E. (EPA:ALS30) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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 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. 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'.
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 Solutions 30:
0.15 = €27m ÷ (€530m - €355m) (Based on the trailing twelve months to December 2018.)
So, Solutions 30 has an ROCE of 15%.
Is Solutions 30's ROCE Good?
One way to assess ROCE is to compare similar companies. Solutions 30's ROCE appears to be substantially greater than the 12% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Solutions 30's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Solutions 30 currently has an ROCE of 15%, compared to its ROCE of 10.0% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Solutions 30's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Solutions 30.
Do Solutions 30'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Solutions 30 has total liabilities of €355m and total assets of €530m. Therefore its current liabilities are equivalent to approximately 67% of its total assets. Solutions 30 has a relatively high level of current liabilities, boosting its ROCE meaningfully.
What We Can Learn From Solutions 30's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Solutions 30 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 firstname.lastname@example.org. 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.