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Should You Like SSP Group plc’s (LON:SSPG) High Return On Capital Employed?

Simply Wall St

Today we are going to look at SSP Group plc (LON:SSPG) 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 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.

What is 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. Generally speaking a higher ROCE is better. 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 SSP Group:

0.20 = UK£201m ÷ (UK£1.6b - UK£600m) (Based on the trailing twelve months to March 2019.)

So, SSP Group has an ROCE of 20%.

Check out our latest analysis for SSP Group

Is SSP Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, SSP Group's ROCE is meaningfully higher than the 7.6% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, SSP Group's ROCE is currently very good.

We can see that , SSP Group currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 12%. This makes us wonder if the company is improving. You can see in the image below how SSP Group's ROCE compares to its industry. Click to see more on past growth.

LSE:SSPG Past Revenue and Net Income, August 25th 2019

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, 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.

SSP Group's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

SSP Group has total liabilities of UK£600m and total assets of UK£1.6b. Therefore its current liabilities are equivalent to approximately 37% of its total assets. A medium level of current liabilities boosts SSP Group's ROCE somewhat.

What We Can Learn From SSP Group's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. SSP Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.