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Why We’re Not Keen On Byte Computer SA’s (ATH:BYTE) 5.6% Return On Capital

Simply Wall St

Today we are going to look at Byte Computer SA (ATH:BYTE) to see whether it might be an attractive investment prospect. 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. 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Byte Computer:

0.056 = €941k ÷ (€32m - €15m) (Based on the trailing twelve months to June 2019.)

So, Byte Computer has an ROCE of 5.6%.

See our latest analysis for Byte Computer

Does Byte Computer Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Byte Computer's ROCE appears to be significantly below the 13% average in the IT industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Byte Computer stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Byte Computer reported an ROCE of 5.6% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Byte Computer's ROCE compares to its industry. Click to see more on past growth.

ATSE:BYTE Past Revenue and Net Income, January 15th 2020

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 only a point-in-time measure. How cyclical is Byte Computer? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Byte Computer's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Byte Computer has total liabilities of €15m and total assets of €32m. As a result, its current liabilities are equal to approximately 47% of its total assets. Byte Computer's middling level of current liabilities have the effect of boosting its ROCE a bit.

Our Take On Byte Computer's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Byte Computer better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.