Are artnet AG’s (ETR:ART) High Returns Really That Great?

Simply Wall St

Today we'll look at artnet AG (ETR:ART) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

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.

What is 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. Generally speaking a higher ROCE is better. 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 artnet:

0.20 = €1.2m ÷ (€11m - €4.9m) (Based on the trailing twelve months to June 2019.)

So, artnet has an ROCE of 20%.

View our latest analysis for artnet

Does artnet Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that artnet's ROCE is meaningfully better than the 11% average in the Online Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, artnet's ROCE is currently very good.

We can see that, artnet currently has an ROCE of 20%, less than the 61% it reported 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 artnet's past growth compares to other companies.

XTRA:ART Past Revenue and Net Income, December 2nd 2019

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. ROCE is only a point-in-time measure. You can check if artnet has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect artnet's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

artnet has total assets of €11m and current liabilities of €4.9m. As a result, its current liabilities are equal to approximately 44% of its total assets. artnet's ROCE is boosted somewhat by its middling amount of current liabilities.

What We Can Learn From artnet's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. artnet shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.