Yahoo Finance Should You Like ZEAL Network SE’s (ETR:TIM) High Return On Capital Employed?
Today we’ll look at ZEAL Network SE (ETR:TIM) 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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 ZEAL Network:
0.29 = €20m ÷ (€161m – €33m) (Based on the trailing twelve months to September 2018.)
So, ZEAL Network has an ROCE of 29%.
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Does ZEAL Network Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that ZEAL Network’s ROCE is meaningfully better than the 7.8% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, ZEAL Network’s ROCE in absolute terms currently looks quite high.
ZEAL Network delivered an ROCE of 29%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ZEAL Network.
How ZEAL Network’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
ZEAL Network has total assets of €161m and current liabilities of €33m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
What We Can Learn From ZEAL Network’s ROCE
This is good to see, and with such a high ROCE, ZEAL Network may be worth a closer look. But note: ZEAL Network 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.
