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Why We’re Not Keen On Credit Intelligence Limited’s (ASX:CI1) 11% Return On Capital

Simply Wall St

Today we are going to look at Credit Intelligence Limited (ASX:CI1) 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. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Credit Intelligence:

0.11 = AU$1.1m ÷ (AU$13m - AU$3.4m) (Based on the trailing twelve months to June 2019.)

Therefore, Credit Intelligence has an ROCE of 11%.

Check out our latest analysis for Credit Intelligence

Does Credit Intelligence Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Credit Intelligence's ROCE appears to be significantly below the 16% average in the Commercial Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Credit Intelligence compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

You can see in the image below how Credit Intelligence's ROCE compares to its industry. Click to see more on past growth.

ASX:CI1 Past Revenue and Net Income, December 22nd 2019
ASX:CI1 Past Revenue and Net Income, December 22nd 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. 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 Credit Intelligence's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.

Credit Intelligence has total liabilities of AU$3.4m and total assets of AU$13m. As a result, its current liabilities are equal to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Credit Intelligence's ROCE

Overall, Credit Intelligence has a decent ROCE and could be worthy of further research. Credit Intelligence shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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 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.