Yahoo Finance What Can We Make Of Finsbury Food Group Plc’s (LON:FIF) High Return On Capital?
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Today we are going to look at Finsbury Food Group Plc (LON:FIF) 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. Then we'll compare its ROCE 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its 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.'
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 Finsbury Food Group:
0.15 = UK£19m ÷ (UK£239m - UK£113m) (Based on the trailing twelve months to December 2018.)
So, Finsbury Food Group has an ROCE of 15%.
Check out our latest analysis for Finsbury Food Group
Is Finsbury Food Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Finsbury Food Group's ROCE is meaningfully better than the 12% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Finsbury Food Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.
What Are Current Liabilities, And How Do They Affect Finsbury Food Group's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Finsbury Food Group has total liabilities of UK£113m and total assets of UK£239m. As a result, its current liabilities are equal to approximately 47% of its total assets. Finsbury Food Group has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Finsbury Food Group's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than Finsbury Food Group 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.
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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.
