U.S. Markets closed

Why We’re Not Keen On Bastogi S.p.A.’s (BIT:B) 0.6% Return On Capital

Simply Wall St

Today we'll look at Bastogi S.p.A. (BIT:B) and reflect on its potential as an investment. 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 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Bastogi:

0.0062 = €2.0m ÷ (€386m - €71m) (Based on the trailing twelve months to June 2019.)

Therefore, Bastogi has an ROCE of 0.6%.

View our latest analysis for Bastogi

Does Bastogi Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Bastogi's ROCE is meaningfully below the Commercial Services industry average of 9.2%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Bastogi'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.

Bastogi delivered an ROCE of 0.6%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how Bastogi's ROCE compares to its industry, and you can click it to see more detail on its past growth.

BIT:B Past Revenue and Net Income, January 26th 2020

It is important to remember that ROCE shows past performance, and is 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. You can check if Bastogi has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Bastogi's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Bastogi has total assets of €386m and current liabilities of €71m. As a result, its current liabilities are equal to approximately 18% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On Bastogi's ROCE

Bastogi 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.