Yahoo Finance Are SRT Marine Systems plc’s (LON:SRT) High Returns Really That Great?
Today we are going to look at SRT Marine Systems plc (LON:SRT) 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. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 SRT Marine Systems:
0.13 = UK£3.3m ÷ (UK£30m - UK£5.1m) (Based on the trailing twelve months to September 2019.)
Therefore, SRT Marine Systems has an ROCE of 13%.
See our latest analysis for SRT Marine Systems
Does SRT Marine Systems Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, SRT Marine Systems's ROCE is meaningfully higher than the 7.8% average in the Communications industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where SRT Marine Systems sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
SRT Marine Systems delivered an ROCE of 13%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how SRT Marine Systems'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. ROCE is, after all, simply a snap shot of a single year. How cyclical is SRT Marine Systems? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect SRT Marine Systems's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
SRT Marine Systems has total assets of UK£30m and current liabilities of UK£5.1m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On SRT Marine Systems's ROCE
Overall, SRT Marine Systems has a decent ROCE and could be worthy of further research. There might be better investments than SRT Marine Systems 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.
SRT Marine Systems is not the only stock insiders are buying. So take a peek at this free list of growing companies with 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.
