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Why C-Com Satellite Systems Inc.’s (CVE:CMI) Return On Capital Employed Is Impressive

Today we'll evaluate C-Com Satellite Systems Inc. (CVE:CMI) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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'.

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 C-Com Satellite Systems:

0.16 = CA$3.4m ÷ (CA$22m - CA$1.1m) (Based on the trailing twelve months to May 2019.)

So, C-Com Satellite Systems has an ROCE of 16%.

See our latest analysis for C-Com Satellite Systems

Is C-Com Satellite Systems's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that C-Com Satellite Systems's ROCE is meaningfully better than the 8.8% average in the Communications industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where C-Com Satellite Systems sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that C-Com Satellite Systems currently has an ROCE of 16%, compared to its ROCE of 7.3% 3 years ago. This makes us think the business might be improving. You can see in the image below how C-Com Satellite Systems's ROCE compares to its industry. Click to see more on past growth.

TSXV:CMI Past Revenue and Net Income, October 9th 2019
TSXV:CMI Past Revenue and Net Income, October 9th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. How cyclical is C-Com Satellite Systems? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do C-Com Satellite Systems's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

C-Com Satellite Systems has total liabilities of CA$1.1m and total assets of CA$22m. Therefore its current liabilities are equivalent to approximately 4.9% of its total assets. Low current liabilities have only a minimal impact on C-Com Satellite Systems's ROCE, making its decent returns more credible.

Our Take On C-Com Satellite Systems's ROCE

This is good to see, and while better prospects may exist, C-Com Satellite Systems seems worth researching further. There might be better investments than C-Com Satellite Systems 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 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.

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