Yahoo Finance What Can We Make Of ITV plc’s (LON:ITV) High Return On Capital?
Today we are going to look at ITV plc (LON:ITV) 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. 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 amount of pre-tax profits a company can generate from the 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.
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 ITV:
0.30 = UK£625m ÷ (UK£3.5b - UK£1.4b) (Based on the trailing twelve months to June 2019.)
So, ITV has an ROCE of 30%.
View our latest analysis for ITV
Does ITV Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. ITV's ROCE appears to be substantially greater than the 7.8% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, ITV's ROCE is currently very good.
We can see that, ITV currently has an ROCE of 30%, less than the 41% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how ITV's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
ITV'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. 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.
ITV has total liabilities of UK£1.4b and total assets of UK£3.5b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. A medium level of current liabilities boosts ITV's ROCE somewhat.
The Bottom Line On ITV's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than ITV 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.
