Today we'll evaluate Autostrade Meridionali S.p.A. (BIT:AUTME) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

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 measures the amount of pre-tax profits a company can generate from the 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'.

How Do You Calculate Return On Capital Employed?

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 Autostrade Meridionali:

0.20 = €36m ÷ (€478m - €293m) (Based on the trailing twelve months to June 2019.)

Therefore, Autostrade Meridionali has an ROCE of 20%.

Check out our latest analysis for Autostrade Meridionali

Does Autostrade Meridionali Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Autostrade Meridionali's ROCE is meaningfully better than the 12% average in the Infrastructure industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Autostrade Meridionali'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, Autostrade Meridionali's ROCE appears to be 20%, compared to 3 years ago, when its ROCE was 15%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Autostrade Meridionali's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Autostrade Meridionali is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.