Today we'll evaluate PunaMusta Media Oyj (HEL:PUMU) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 PunaMusta Media Oyj:
0.016 = €1.0m ÷ (€95m - €31m) (Based on the trailing twelve months to June 2019.)
So, PunaMusta Media Oyj has an ROCE of 1.6%.
View our latest analysis for PunaMusta Media Oyj
Is PunaMusta Media Oyj's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, PunaMusta Media Oyj's ROCE appears to be significantly below the 10% average in the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how PunaMusta Media Oyj 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.
PunaMusta Media Oyj's current ROCE of 1.6% is lower than its ROCE in the past, which was 5.7%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how PunaMusta Media Oyj's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for PunaMusta Media Oyj.