Yahoo Finance Why Euromoney Institutional Investor PLC’s (LON:ERM) Return On Capital Employed Is Impressive
Today we'll evaluate Euromoney Institutional Investor PLC (LON:ERM) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, 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 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. Overall, it is a valuable metric that has its flaws. 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 Euromoney Institutional Investor:
0.30 = UK£167m ÷ (UK£798m - UK£250m) (Based on the trailing twelve months to March 2019.)
So, Euromoney Institutional Investor has an ROCE of 30%.
See our latest analysis for Euromoney Institutional Investor
Is Euromoney Institutional Investor's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Euromoney Institutional Investor's ROCE is meaningfully better than the 9.8% average in the Media 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 the industry comparison, in absolute terms, Euromoney Institutional Investor's ROCE currently appears to be excellent.
The image below shows how Euromoney Institutional Investor's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Euromoney Institutional Investor.
Do Euromoney Institutional Investor's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Euromoney Institutional Investor has total assets of UK£798m and current liabilities of UK£250m. As a result, its current liabilities are equal to approximately 31% of its total assets. A medium level of current liabilities boosts Euromoney Institutional Investor's ROCE somewhat.
The Bottom Line On Euromoney Institutional Investor's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Euromoney Institutional Investor looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
