In This Article:
Today we'll look at Qwamplify (EPA:ALQWA) 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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?
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 Qwamplify:
0.072 = €2.2m ÷ (€57m - €27m) (Based on the trailing twelve months to March 2019.)
Therefore, Qwamplify has an ROCE of 7.2%.
View our latest analysis for Qwamplify
Does Qwamplify Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Qwamplify's ROCE is around the 8.9% average reported by the Media industry. Setting aside the industry comparison for now, Qwamplify's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, Qwamplify currently has an ROCE of 7.2% compared to its ROCE 3 years ago, which was 4.2%. This makes us wonder if the company is improving. You can see in the image below how Qwamplify's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Qwamplify? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Qwamplify's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.