Yahoo Finance Should You Like Christie Group plc’s (LON:CTG) High Return On Capital Employed?
Today we'll evaluate Christie Group plc (LON:CTG) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Christie Group:
0.19 = UK£3.3m ÷ (UK£37m - UK£19m) (Based on the trailing twelve months to June 2019.)
Therefore, Christie Group has an ROCE of 19%.
See our latest analysis for Christie Group
Is Christie Group's ROCE Good?
One way to assess ROCE is to compare similar companies. Christie Group's ROCE appears to be substantially greater than the 15% average in the Professional Services 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, Christie Group's ROCE currently appears to be excellent.
Our data shows that Christie Group currently has an ROCE of 19%, compared to its ROCE of 8.8% 3 years ago. This makes us think the business might be improving. The image below shows how Christie Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Christie Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Christie Group's Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Christie Group has total assets of UK£37m and current liabilities of UK£19m. As a result, its current liabilities are equal to approximately 52% of its total assets. While a high level of current liabilities boosts its ROCE, Christie Group's returns are still very good.
The Bottom Line On Christie Group's ROCE
So to us, the company is potentially worth investigating further. Christie Group 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.
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.
