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Today we are going to look at Getech Group Plc (LON:GTC) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. 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'.
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 Getech Group:
0.031 = UK£447k ÷ (UK£17m - UK£3.0m) (Based on the trailing twelve months to December 2018.)
So, Getech Group has an ROCE of 3.1%.
See our latest analysis for Getech Group
Does Getech Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Getech Group's ROCE appears to be significantly below the 11% average in the Energy Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Getech Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Getech Group's current ROCE of 3.1% is lower than 3 years ago, when the company reported a 8.0% ROCE. Therefore we wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past performance, and is 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. Remember that most companies like Getech Group are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Getech Group.