Yahoo Finance How Do Stilo International plc’s (LON:STL) Returns On Capital Compare To Peers?
Today we’ll look at Stilo International plc (LON:STL) and reflect on its potential as an investment. 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Stilo International:
0.055 = UK£303k ÷ (UK£4.2m – UK£472k) (Based on the trailing twelve months to June 2018.)
So, Stilo International has an ROCE of 5.5%.
Check out our latest analysis for Stilo International
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Does Stilo International Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Stilo International’s ROCE appears to be significantly below the 12% average in the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Stilo International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Stilo International’s current ROCE of 5.5% is lower than 3 years ago, when the company reported a 7.4% ROCE. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Stilo International? 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 Stilo International’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Stilo International has total assets of UK£4.2m and current liabilities of UK£472k. As a result, its current liabilities are equal to approximately 11% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Stilo International’s ROCE
With that in mind, we’re not overly impressed with Stilo International’s ROCE, so it may not be the most appealing prospect. But note: Stilo International may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
