Today we'll look at Altia Consultores, S.A. (BME:ALC) 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 up, we'll look at what ROCE is and how we calculate it. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Altia Consultores:

0.21 = €8.7m ÷ (€55m - €13m) (Based on the trailing twelve months to June 2019.)

So, Altia Consultores has an ROCE of 21%.

View our latest analysis for Altia Consultores

Does Altia Consultores Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Altia Consultores's ROCE is meaningfully better than the 9.3% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Altia Consultores's ROCE is currently very good.

Altia Consultores's current ROCE of 21% is lower than its ROCE in the past, which was 36%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Altia Consultores's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Altia Consultores? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Altia Consultores's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Altia Consultores has total liabilities of €13m and total assets of €55m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

Our Take On Altia Consultores's ROCE

With low current liabilities and a high ROCE, Altia Consultores could be worthy of further investigation. Altia Consultores shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Altia Consultores better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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