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What We Think Of discoverIE Group plc’s (LON:DSCV) Investment Potential

Simply Wall St

Today we are going to look at discoverIE Group plc (LON:DSCV) 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.

Firstly, 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.

Return On Capital Employed (ROCE): What is it?

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?

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 discoverIE Group:

0.10 = UK£24m ÷ (UK£328m - UK£96m) (Based on the trailing twelve months to March 2019.)

So, discoverIE Group has an ROCE of 10%.

See our latest analysis for discoverIE Group

Does discoverIE Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that discoverIE Group's ROCE is fairly close to the Electronic industry average of 11%. Separate from discoverIE Group'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 discoverIE Group currently has an ROCE of 10%, compared to its ROCE of 7.4% 3 years ago. This makes us think the business might be improving. The image below shows how discoverIE Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

LSE:DSCV Past Revenue and Net Income, September 26th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for discoverIE Group.

discoverIE 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

discoverIE Group has total liabilities of UK£96m and total assets of UK£328m. As a result, its current liabilities are equal to approximately 29% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On discoverIE Group's ROCE

Overall, discoverIE Group has a decent ROCE and could be worthy of further research. discoverIE 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.