In This Article:
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Today we are going to look at North Media A/S (CPH:NORTHM) 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.
Firstly, we’ll go over how we calculate ROCE. 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 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. 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?
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 North Media:
0.16 = ø110m ÷ (ø825m – ø155m) (Based on the trailing twelve months to December 2018.)
Therefore, North Media has an ROCE of 16%.
Check out our latest analysis for North Media
Does North Media Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, North Media’s ROCE is meaningfully higher than the 10.0% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from North Media’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, North Media’s ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 1.4%. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. How cyclical is North Media? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.