Why Kin and Carta plc’s (LON:KCT) Return On Capital Employed Looks Uninspiring
Today we are going to look at Kin and Carta plc (LON:KCT) to see whether it might be an attractive investment prospect. 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. Then we'll determine how its current liabilities are affecting 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. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Kin and Carta:
0.052 = UK£8.1m ÷ (UK£195m - UK£38m) (Based on the trailing twelve months to July 2019.)
Therefore, Kin and Carta has an ROCE of 5.2%.
View our latest analysis for Kin and Carta
Does Kin and Carta Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Kin and Carta's ROCE appears meaningfully below the 8.3% average reported by the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Kin and Carta stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Kin and Carta's current ROCE of 5.2% is lower than its ROCE in the past, which was 9.0%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Kin and Carta'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. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Kin and Carta's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Kin and Carta has total assets of UK£195m and current liabilities of UK£38m. As a result, its current liabilities are equal to approximately 20% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
The Bottom Line On Kin and Carta's ROCE
If Kin and Carta continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Kin and Carta. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
Kin and Carta is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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. Thank you for reading.
