Advertisement
UK markets closed
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • FTSE 250

    19,884.73
    +74.07 (+0.37%)
     
  • AIM

    743.26
    +1.15 (+0.15%)
     
  • GBP/EUR

    1.1709
    +0.0016 (+0.14%)
     
  • GBP/USD

    1.2629
    +0.0007 (+0.06%)
     
  • Bitcoin GBP

    56,061.66
    +974.75 (+1.77%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • NIKKEI 225

    40,329.25
    +161.18 (+0.40%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • CAC 40

    8,205.81
    +1.00 (+0.01%)
     

A Close Look At Technogym S.p.A.’s (BIT:TGYM) 35% ROCE

Today we are going to look at Technogym S.p.A. (BIT:TGYM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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:

ADVERTISEMENT

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Technogym:

0.35 = €110m ÷ (€607m - €292m) (Based on the trailing twelve months to June 2019.)

So, Technogym has an ROCE of 35%.

See our latest analysis for Technogym

Does Technogym Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Technogym's ROCE appears to be substantially greater than the 13% average in the Leisure industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Technogym's ROCE in absolute terms currently looks quite high.

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

BIT:TGYM Past Revenue and Net Income, November 26th 2019
BIT:TGYM Past Revenue and Net Income, November 26th 2019

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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Technogym.

How Technogym's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Technogym has total liabilities of €292m and total assets of €607m. As a result, its current liabilities are equal to approximately 48% of its total assets. Technogym has a medium level of current liabilities, boosting its ROCE somewhat.

Our Take On Technogym's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Technogym out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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.