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Why SAES Getters S.p.A.’s (BIT:SG) Return On Capital Employed Might Be A Concern

Simply Wall St

Today we'll look at SAES Getters S.p.A. (BIT:SG) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. 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 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?

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 SAES Getters:

0.058 = €22m ÷ (€441m - €61m) (Based on the trailing twelve months to September 2019.)

So, SAES Getters has an ROCE of 5.8%.

View our latest analysis for SAES Getters

Is SAES Getters's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, SAES Getters's ROCE appears to be significantly below the 11% average in the Electronic industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how SAES Getters stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

We can see that, SAES Getters currently has an ROCE of 5.8%, less than the 15% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how SAES Getters's ROCE compares to its industry, and you can click it to see more detail on its past growth.

BIT:SG Past Revenue and Net Income, January 17th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for SAES Getters.

What Are Current Liabilities, And How Do They Affect SAES Getters's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

SAES Getters has total assets of €441m and current liabilities of €61m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On SAES Getters's ROCE

If SAES Getters continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than SAES Getters. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.