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Today we’ll evaluate Industria de Diseño Textil, S.A. (BME:ITX) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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.’
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 Industria de Diseño Textil:
0.30 = €4.4b ÷ (€22b – €7.2b) (Based on the trailing twelve months to October 2018.)
Therefore, Industria de Diseño Textil has an ROCE of 30%.
Does Industria de Diseño Textil Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Industria de Diseño Textil’s ROCE is meaningfully better than the 12% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Industria de Diseño Textil’s ROCE currently appears to be excellent.
When considering this metric, keep in mind that it is backwards looking, and 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 Industria de Diseño Textil.
What Are Current Liabilities, And How Do They Affect Industria de Diseño Textil’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.
Industria de Diseño Textil has total liabilities of €7.2b and total assets of €22b. As a result, its current liabilities are equal to approximately 32% of its total assets. Industria de Diseño Textil’s ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Industria de Diseño Textil’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than Industria de Diseño Textil. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Industria de Diseño Textil better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 firstname.lastname@example.org.