Yahoo Finance Should You Like Rai Way S.p.A.’s (BIT:RWAY) High Return On Capital Employed?
Today we'll evaluate Rai Way S.p.A. (BIT:RWAY) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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 Rai Way:
0.40 = €86m ÷ (€323m - €104m) (Based on the trailing twelve months to June 2019.)
So, Rai Way has an ROCE of 40%.
See our latest analysis for Rai Way
Does Rai Way Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Rai Way's ROCE is meaningfully better than the 9.3% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Rai Way's ROCE in absolute terms currently looks quite high.
Our data shows that Rai Way currently has an ROCE of 40%, compared to its ROCE of 25% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Rai Way's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Rai Way.
Rai Way'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.
Rai Way has total liabilities of €104m and total assets of €323m. As a result, its current liabilities are equal to approximately 32% of its total assets. Rai Way's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Rai Way's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Rai Way 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).
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.
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. Thank you for reading.
