In This Article:
Today we'll evaluate Bilendi SA (EPA:ALBLD) 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.
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.
Return On Capital Employed (ROCE): What is it?
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 Bilendi:
0.13 = €3.3m ÷ (€34m - €9.6m) (Based on the trailing twelve months to December 2018.)
Therefore, Bilendi has an ROCE of 13%.
Check out our latest analysis for Bilendi
Is Bilendi's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Bilendi's ROCE is meaningfully higher than the 9.7% 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. Separate from Bilendi's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Bilendi delivered an ROCE of 13%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Bilendi's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. 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 Bilendi.
How Bilendi'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 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.