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Today we are going to look at cBrain A/S (CPH:CBRAIN) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. 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 measures the 'return' (pre-tax profit) a company generates from capital employed 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 cBrain:
0.10 = ø9.6m ÷ (ø112m - ø17m) (Based on the trailing twelve months to June 2019.)
Therefore, cBrain has an ROCE of 10%.
See our latest analysis for cBrain
Does cBrain Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that cBrain's ROCE is fairly close to the Software industry average of 11%. Separate from cBrain's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, cBrain currently has an ROCE of 10%, less than the 20% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how cBrain's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If cBrain is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
cBrain'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 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.