Yahoo Finance What We Think Of Innelec Multimédia SA’s (EPA:INN) Investment Potential
Today we'll look at Innelec Multimédia SA (EPA:INN) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.
So, How Do We Calculate ROCE?
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 Innelec Multimédia:
0.091 = €1.9m ÷ (€65m - €43m) (Based on the trailing twelve months to September 2019.)
Therefore, Innelec Multimédia has an ROCE of 9.1%.
See our latest analysis for Innelec Multimédia
Is Innelec Multimédia's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Innelec Multimédia's ROCE is around the 7.8% average reported by the Electronic industry. Regardless of where Innelec Multimédia sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Innelec Multimédia delivered an ROCE of 9.1%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Innelec Multimédia'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Innelec Multimédia.
How Innelec Multimédia's Current Liabilities Impact 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Innelec Multimédia has current liabilities of €43m and total assets of €65m. As a result, its current liabilities are equal to approximately 67% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
What We Can Learn From Innelec Multimédia's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Innelec Multimédia 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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.
