Yahoo Finance Is I.M.A. Industria Macchine Automatiche S.p.A.’s (BIT:IMA) 13% ROCE Any Good?
Today we are going to look at I.M.A. Industria Macchine Automatiche S.p.A. (BIT:IMA) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 I.M.A. Industria Macchine Automatiche:
0.13 = €178m ÷ (€2.3b - €935m) (Based on the trailing twelve months to September 2019.)
So, I.M.A. Industria Macchine Automatiche has an ROCE of 13%.
See our latest analysis for I.M.A. Industria Macchine Automatiche
Is I.M.A. Industria Macchine Automatiche's ROCE Good?
One way to assess ROCE is to compare similar companies. I.M.A. Industria Macchine Automatiche's ROCE appears to be substantially greater than the 11% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where I.M.A. Industria Macchine Automatiche sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
I.M.A. Industria Macchine Automatiche's current ROCE of 13% is lower than its ROCE in the past, which was 23%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how I.M.A. Industria Macchine Automatiche'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. 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 I.M.A. Industria Macchine Automatiche'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. 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.
I.M.A. Industria Macchine Automatiche has current liabilities of €935m and total assets of €2.3b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. With this level of current liabilities, I.M.A. Industria Macchine Automatiche's ROCE is boosted somewhat.
What We Can Learn From I.M.A. Industria Macchine Automatiche's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. I.M.A. Industria Macchine Automatiche 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.
I will like I.M.A. Industria Macchine Automatiche better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
