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Why We’re Not Keen On Il Sole 24 ORE S.p.A.’s (BIT:S24) 5.2% Return On Capital

Simply Wall St

Today we'll evaluate Il Sole 24 ORE S.p.A. (BIT:S24) to determine whether it could have potential as an investment idea. 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, 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.

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.

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 Il Sole 24 ORE:

0.052 = €4.9m ÷ (€215m - €120m) (Based on the trailing twelve months to September 2019.)

So, Il Sole 24 ORE has an ROCE of 5.2%.

Check out our latest analysis for Il Sole 24 ORE

Is Il Sole 24 ORE's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Il Sole 24 ORE's ROCE appears meaningfully below the 9.4% average reported by the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Il Sole 24 ORE's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Il Sole 24 ORE has an ROCE of 5.2%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Il Sole 24 ORE's ROCE compares to its industry, and you can click it to see more detail on its past growth.

BIT:S24 Past Revenue and Net Income March 27th 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Il Sole 24 ORE.

Il Sole 24 ORE's Current Liabilities And Their Impact On Its 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.

Il Sole 24 ORE has total assets of €215m and current liabilities of €120m. As a result, its current liabilities are equal to approximately 56% of its total assets. With a high level of current liabilities, Il Sole 24 ORE will experience a boost to its ROCE.

Our Take On Il Sole 24 ORE's ROCE

Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. 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).

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.