Yahoo Finance Is Bittium Oyj (HEL:BITTI) Better Than Average At Deploying Capital?
Today we'll look at Bittium Oyj (HEL:BITTI) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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 Bittium Oyj:
0.042 = €5.3m ÷ (€150m - €22m) (Based on the trailing twelve months to June 2019.)
So, Bittium Oyj has an ROCE of 4.2%.
View our latest analysis for Bittium Oyj
Does Bittium Oyj Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Bittium Oyj's ROCE is around the 5.1% average reported by the Software industry. Setting aside the industry comparison for now, Bittium Oyj's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, Bittium Oyj's ROCE appears to be 4.2%, compared to 3 years ago, when its ROCE was 1.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Bittium Oyj's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Bittium Oyj'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Bittium Oyj has total liabilities of €22m and total assets of €150m. As a result, its current liabilities are equal to approximately 15% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Bittium Oyj's ROCE
With that in mind, we're not overly impressed with Bittium Oyj's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Bittium Oyj. 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.
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.
