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Why Sciuker Frames S.p.A.’s (BIT:SCK) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we are going to look at Sciuker Frames S.p.A. (BIT:SCK) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 Sciuker Frames:

0.031 = €501k ÷ (€25m - €8.4m) (Based on the trailing twelve months to June 2019.)

So, Sciuker Frames has an ROCE of 3.1%.

See our latest analysis for Sciuker Frames

Is Sciuker Frames's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Sciuker Frames's ROCE appears meaningfully below the 11% average reported by the Building industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Sciuker Frames stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

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

BIT:SCK Past Revenue and Net Income, January 16th 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sciuker Frames.

How Sciuker Frames's Current Liabilities Impact Its 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 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.

Sciuker Frames has total assets of €25m and current liabilities of €8.4m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Sciuker Frames has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

Our Take On Sciuker Frames's ROCE

So researching other companies may be a better use of your time. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Sciuker Frames better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.