U.S. Markets closed

Why We Like SciPlay Corporation’s (NASDAQ:SCPL) 27% Return On Capital Employed

Simply Wall St

Today we'll look at SciPlay Corporation (NASDAQ:SCPL) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. 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 SciPlay:

0.27 = US$82m ÷ (US$337m - US$36m) (Based on the trailing twelve months to June 2019.)

Therefore, SciPlay has an ROCE of 27%.

Check out our latest analysis for SciPlay

Does SciPlay Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. SciPlay's ROCE appears to be substantially greater than the 8.4% average in the Entertainment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, SciPlay's ROCE currently appears to be excellent.

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

NasdaqGS:SCPL Past Revenue and Net Income, October 9th 2019

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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

SciPlay's Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

SciPlay has total liabilities of US$36m and total assets of US$337m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

Our Take On SciPlay's ROCE

This is good to see, and with such a high ROCE, SciPlay may be worth a closer look. SciPlay 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.

SciPlay is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.

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. Thank you for reading.