Yahoo Finance Are The SimplyBiz Group plc’s (LON:SBIZ) High Returns Really That Great?
Today we are going to look at The SimplyBiz Group plc (LON:SBIZ) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 SimplyBiz Group:
0.38 = UK£11m ÷ (UK£46m - UK£18m) (Based on the trailing twelve months to December 2018.)
Therefore, SimplyBiz Group has an ROCE of 38%.
Check out our latest analysis for SimplyBiz Group
Is SimplyBiz Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, SimplyBiz Group's ROCE is meaningfully higher than the 20% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, SimplyBiz Group's ROCE currently appears to be excellent.
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 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for SimplyBiz Group.
What Are Current Liabilities, And How Do They Affect SimplyBiz Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
SimplyBiz Group has total liabilities of UK£18m and total assets of UK£46m. As a result, its current liabilities are equal to approximately 39% of its total assets. A medium level of current liabilities boosts SimplyBiz Group's ROCE somewhat.
What We Can Learn From SimplyBiz Group's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
