Today we are going to look at Infrastrutture Wireless Italiane S.p.A. (BIT:INW) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 Infrastrutture Wireless Italiane:
0.096 = €226m ÷ (€2.6b - €248m) (Based on the trailing twelve months to December 2019.)
So, Infrastrutture Wireless Italiane has an ROCE of 9.6%.
Is Infrastrutture Wireless Italiane's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Infrastrutture Wireless Italiane's ROCE appears to be around the 9.6% average of the Telecom industry. Regardless of where Infrastrutture Wireless Italiane sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
The image below shows how Infrastrutture Wireless Italiane's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Infrastrutture Wireless Italiane.
What Are Current Liabilities, And How Do They Affect Infrastrutture Wireless Italiane's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Infrastrutture Wireless Italiane has current liabilities of €248m and total assets of €2.6b. As a result, its current liabilities are equal to approximately 9.6% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Infrastrutture Wireless Italiane earns a sound return on capital employed.
Our Take On Infrastrutture Wireless Italiane's ROCE
If it is able to keep this up, Infrastrutture Wireless Italiane could be attractive. Infrastrutture Wireless Italiane 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at email@example.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.