Today we'll evaluate CTS Eventim AG & Co. KGaA (ETR:EVD) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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'.
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 CTS Eventim KGaA:
0.29 = €203m ÷ (€1.5b - €837m) (Based on the trailing twelve months to September 2019.)
Therefore, CTS Eventim KGaA has an ROCE of 29%.
Is CTS Eventim KGaA's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that CTS Eventim KGaA's ROCE is meaningfully better than the 7.2% average in the Entertainment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, CTS Eventim KGaA's ROCE is currently very good.
The image below shows how CTS Eventim KGaA's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CTS Eventim KGaA.
How CTS Eventim KGaA'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.
CTS Eventim KGaA has total assets of €1.5b and current liabilities of €837m. As a result, its current liabilities are equal to approximately 54% of its total assets. CTS Eventim KGaA boasts an attractive ROCE, even after considering the boost from high current liabilities.
The Bottom Line On CTS Eventim KGaA's ROCE
In my book, this business could be worthy of further research. There might be better investments than CTS Eventim KGaA 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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