In This Article:
Today we'll look at iGrandiViaggi S.p.A. (BIT:IGV) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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 iGrandiViaggi:
0.0036 = €303k ÷ (€109m - €24m) (Based on the trailing twelve months to January 2020.)
Therefore, iGrandiViaggi has an ROCE of 0.4%.
Check out our latest analysis for iGrandiViaggi
Is iGrandiViaggi's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, iGrandiViaggi's ROCE appears to be significantly below the 7.1% average in the Hospitality industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how iGrandiViaggi stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
iGrandiViaggi's current ROCE of 0.4% is lower than 3 years ago, when the company reported a 2.3% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how iGrandiViaggi's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for iGrandiViaggi.