Today we are going to look at Christie Group plc (LON:CTG) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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 Christie Group:

0.29 = UK£3.8m ÷ (UK£32m - UK£19m) (Based on the trailing twelve months to December 2018.)

Therefore, Christie Group has an ROCE of 29%.

View our latest analysis for Christie Group

Does Christie Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Christie Group's ROCE is meaningfully better than the 18% average in the Professional Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Christie Group's ROCE currently appears to be excellent.

The image below shows how Christie Group's ROCE compares to its industry, and you can click it to see more detail on its 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. ROCE is only a point-in-time measure. How cyclical is Christie Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Christie Group's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Christie Group has total liabilities of UK£19m and total assets of UK£32m. Therefore its current liabilities are equivalent to approximately 59% of its total assets. While a high level of current liabilities boosts its ROCE, Christie Group's returns are still very good.

What We Can Learn From Christie Group's ROCE

So we would be interested in doing more research here -- there may be an opportunity! There might be better investments than Christie Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

Christie Group is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.

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. Thank you for reading.