In This Article:
Today we'll look at Autostrade Meridionali S.p.A. (BIT:AUTME) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Autostrade Meridionali:
0.16 = €31m ÷ (€489m - €297m) (Based on the trailing twelve months to December 2019.)
So, Autostrade Meridionali has an ROCE of 16%.
See our latest analysis for Autostrade Meridionali
Does Autostrade Meridionali Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Autostrade Meridionali's ROCE is meaningfully higher than the 9.3% average in the Infrastructure 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. Independently of how Autostrade Meridionali compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how Autostrade Meridionali's past growth compares to other companies.
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. If Autostrade Meridionali is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Autostrade Meridionali's Current Liabilities And Their Impact On 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.