In This Article:
Today we are going to look at The Character Group plc (LON:CCT) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Character Group:
0.37 = UK£13m ÷ (UK£57m - UK£22m) (Based on the trailing twelve months to February 2019.)
Therefore, Character Group has an ROCE of 37%.
Check out our latest analysis for Character Group
Is Character Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Character Group's ROCE is meaningfully better than the 14% average in the Leisure 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, Character Group's ROCE currently appears to be excellent.
We can see that, Character Group currently has an ROCE of 37%, less than the 59% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Character Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.