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What We Think Of Destiny Media Technologies Inc.’s (FRA:DME) Investment Potential

Simply Wall St

Today we'll evaluate Destiny Media Technologies Inc. (FRA:DME) to determine whether it could have potential as an investment idea. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the 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?

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 Destiny Media Technologies:

0.25 = US$723k ÷ (US$3.5m - US$520k) (Based on the trailing twelve months to May 2019.)

So, Destiny Media Technologies has an ROCE of 25%.

See our latest analysis for Destiny Media Technologies

Does Destiny Media Technologies Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Destiny Media Technologies's ROCE is fairly close to the Interactive Media and Services industry average of 25%. Setting aside the comparison to its industry for a moment, Destiny Media Technologies's ROCE in absolute terms currently looks quite high.

Destiny Media Technologies has an ROCE of 25%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can click on the image below to see (in greater detail) how Destiny Media Technologies's past growth compares to other companies.

DB:DME Past Revenue and Net Income, August 14th 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Destiny Media Technologies has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Destiny Media Technologies's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Destiny Media Technologies has total assets of US$3.5m and current liabilities of US$520k. Therefore its current liabilities are equivalent to approximately 15% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

Our Take On Destiny Media Technologies's ROCE

Low current liabilities and high ROCE is a good combination, making Destiny Media Technologies look quite interesting. Destiny Media Technologies 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.

I will like Destiny Media Technologies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.