Yahoo Finance Why Amplifon SpA’s (BIT:AMP) Return On Capital Employed Is Impressive
Today we are going to look at Amplifon SpA (BIT:AMP) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. 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?
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 Amplifon:
0.14 = €156m ÷ (€1.6b – €472m) (Based on the trailing twelve months to September 2018.)
Therefore, Amplifon has an ROCE of 14%.
Check out our latest analysis for Amplifon
Does Amplifon Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Amplifon’s ROCE appears to be substantially greater than the 8.6% average in the Healthcare 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 Amplifon sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Amplifon.
How Amplifon’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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Amplifon has total liabilities of €472m and total assets of €1.6b. As a result, its current liabilities are equal to approximately 30% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Amplifon’s ROCE
This is good to see, and with a sound ROCE, Amplifon could be worth a closer look. You might be able to find a better buy than Amplifon. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
