Yahoo Finance Here's What Gateley (Holdings) Plc's (LON:GTLY) ROCE Can Tell Us
Today we'll evaluate Gateley (Holdings) Plc (LON:GTLY) to determine whether it could have potential as an investment idea. 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. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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.
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 Gateley (Holdings):
0.30 = UK£17m ÷ (UK£84m - UK£28m) (Based on the trailing twelve months to October 2019.)
So, Gateley (Holdings) has an ROCE of 30%.
View our latest analysis for Gateley (Holdings)
Is Gateley (Holdings)'s ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Gateley (Holdings)'s ROCE is meaningfully higher than the 15% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Gateley (Holdings)'s ROCE currently appears to be excellent.
We can see that, Gateley (Holdings) currently has an ROCE of 30%, less than the 62% 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 Gateley (Holdings)'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Gateley (Holdings).
What Are Current Liabilities, And How Do They Affect Gateley (Holdings)'s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Gateley (Holdings) has total assets of UK£84m and current liabilities of UK£28m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Gateley (Holdings)'s ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From Gateley (Holdings)'s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Gateley (Holdings) 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
