Yahoo Finance What Can We Make Of SA Catana Group’s (EPA:CATG) High Return On Capital?
Today we'll look at SA Catana Group (EPA:CATG) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for SA Catana Group:
0.21 = €7.7m ÷ (€65m - €28m) (Based on the trailing twelve months to August 2019.)
So, SA Catana Group has an ROCE of 21%.
See our latest analysis for SA Catana Group
Is SA Catana Group's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that SA Catana Group's ROCE is meaningfully better than the 11% average in the Leisure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, SA Catana Group's ROCE is currently very good.
SA Catana Group has an ROCE of 21%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how SA Catana Group's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is SA Catana Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do SA Catana Group's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
SA Catana Group has total assets of €65m and current liabilities of €28m. As a result, its current liabilities are equal to approximately 43% of its total assets. SA Catana Group has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From SA Catana Group's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than SA Catana Group 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.
