Today we are going to look at RCS MediaGroup S.p.A. (BIT:RCS) 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.
Firstly, we'll go over how we 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.
How Do You Calculate Return On Capital Employed?
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 RCS MediaGroup:
0.17 = €114m ÷ (€989m - €325m) (Based on the trailing twelve months to September 2019.)
Therefore, RCS MediaGroup has an ROCE of 17%.
Is RCS MediaGroup's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that RCS MediaGroup's ROCE is meaningfully better than the 9.4% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from RCS MediaGroup's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that RCS MediaGroup currently has an ROCE of 17%, compared to its ROCE of 7.8% 3 years ago. This makes us think the business might be improving. You can see in the image below how RCS MediaGroup's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for RCS MediaGroup.
Do RCS MediaGroup's Current Liabilities Skew 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
RCS MediaGroup has total assets of €989m and current liabilities of €325m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. RCS MediaGroup has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On RCS MediaGroup's ROCE
RCS MediaGroup's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than RCS MediaGroup out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like RCS MediaGroup better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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