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Today we'll evaluate Partner Communications Company Ltd. (NASDAQ:PTNR) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 Partner Communications:
0.041 = ₪116m ÷ (₪4.0b - ₪1.2b) (Based on the trailing twelve months to December 2018.)
So, Partner Communications has an ROCE of 4.1%.
Does Partner Communications Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Partner Communications's ROCE appears to be significantly below the 5.9% average in the Wireless Telecom industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Partner Communications's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
In our analysis, Partner Communications's ROCE appears to be 4.1%, compared to 3 years ago, when its ROCE was 1.8%. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Partner Communications has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Partner Communications's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Partner Communications has total assets of ₪4.0b and current liabilities of ₪1.2b. As a result, its current liabilities are equal to approximately 29% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On Partner Communications's ROCE
Partner Communications has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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 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.