Today we are going to look at CPI Computer Peripherals International (ATH:CPI) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.’
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 CPI Computer Peripherals International:
0.06 = €196k ÷ (€7.9m – €4.6m) (Based on the trailing twelve months to June 2018.)
Therefore, CPI Computer Peripherals International has an ROCE of 6.0%.
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does CPI Computer Peripherals International Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, CPI Computer Peripherals International’s ROCE appears to be significantly below the 14% average in the Electronic industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how CPI Computer Peripherals International compares to its industry, its ROCE in absolute terms is low; especially compared to the ~4.3% available in government bonds. Readers may wish to look for more rewarding investments.
CPI Computer Peripherals International’s current ROCE of 6.0% is lower than 3 years ago, when the company reported a 8.9% ROCE. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is CPI Computer Peripherals International? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How CPI Computer Peripherals International’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 counter this, investors can check if a company has high current liabilities relative to total assets.
CPI Computer Peripherals International has total assets of €7.9m and current liabilities of €4.6m. As a result, its current liabilities are equal to approximately 59% of its total assets. This is a fairly high level of current liabilities, boosting CPI Computer Peripherals International’s ROCE.
The Bottom Line On CPI Computer Peripherals International’s ROCE
CPI Computer Peripherals International’s ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. 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.
I will like CPI Computer Peripherals International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.