Should You Worry About SITI - B&T Group S.p.A.’s (BIT:SITI) ROCE?
Today we are going to look at SITI - B&T Group S.p.A. (BIT:SITI) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. All else being equal, a better business will have a higher ROCE. 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.
So, How Do We Calculate ROCE?
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 SITI - B&T Group:
0.034 = €4.4m ÷ (€254m - €124m) (Based on the trailing twelve months to June 2019.)
So, SITI - B&T Group has an ROCE of 3.4%.
See our latest analysis for SITI - B&T Group
Does SITI - B&T Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see SITI - B&T Group's ROCE is meaningfully below the Machinery industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how SITI - B&T Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. There are potentially more appealing investments elsewhere.
We can see that, SITI - B&T Group currently has an ROCE of 3.4%, less than the 8.2% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how SITI - B&T Group's past growth compares to other companies.
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 SITI - B&T Group.
What Are Current Liabilities, And How Do They Affect SITI - B&T Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
SITI - B&T Group has total assets of €254m and current liabilities of €124m. Therefore its current liabilities are equivalent to approximately 49% of its total assets. With a medium level of current liabilities boosting the ROCE a little, SITI - B&T Group's low ROCE is unappealing.
Our Take On SITI - B&T Group's ROCE
There are likely better investments out there. You might be able to find a better investment than SITI - B&T Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
