Yahoo Finance What Can We Make Of Infotel SA’s (EPA:INF) High Return On Capital?
Today we'll look at Infotel SA (EPA:INF) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Infotel:
0.23 = €22m ÷ (€174m - €76m) (Based on the trailing twelve months to December 2019.)
So, Infotel has an ROCE of 23%.
Check out our latest analysis for Infotel
Is Infotel's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Infotel's ROCE appears to be substantially greater than the 12% average in the IT 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, Infotel's ROCE currently appears to be excellent.
Infotel's current ROCE of 23% is lower than 3 years ago, when the company reported a 31% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Infotel's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Infotel.
Infotel's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.
Infotel has total assets of €174m and current liabilities of €76m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Infotel's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Infotel's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Infotel 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.
