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Why Central European Media Enterprises Ltd.’s (NASDAQ:CETV) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll look at Central European Media Enterprises Ltd. (NASDAQ:CETV) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. 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?

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 Central European Media Enterprises:

0.15 = US$194m ÷ (US$1.5b - US$169m) (Based on the trailing twelve months to June 2019.)

Therefore, Central European Media Enterprises has an ROCE of 15%.

Check out our latest analysis for Central European Media Enterprises

Is Central European Media Enterprises's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Central European Media Enterprises's ROCE is meaningfully higher than the 8.9% average in the Media industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Central European Media Enterprises 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 Central European Media Enterprises currently has an ROCE of 15%, compared to its ROCE of 9.9% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Central European Media Enterprises's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:CETV Past Revenue and Net Income, August 22nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Central European Media Enterprises.

How Central European Media Enterprises's Current Liabilities Impact 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. 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.

Central European Media Enterprises has total liabilities of US$169m and total assets of US$1.5b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Central European Media Enterprises's ROCE

This is good to see, and with a sound ROCE, Central European Media Enterprises could be worth a closer look. Central European Media Enterprises 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.