Today we'll evaluate Next Fifteen Communications Group plc (LON:NFC) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. 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?

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 Next Fifteen Communications Group:

0.16 = UK£27m ÷ (UK£242m - UK£77m) (Based on the trailing twelve months to January 2019.)

So, Next Fifteen Communications Group has an ROCE of 16%.

View our latest analysis for Next Fifteen Communications Group

Is Next Fifteen Communications Group's ROCE Good?

One way to assess ROCE is to compare similar companies. Next Fifteen Communications Group's ROCE appears to be substantially greater than the 9.8% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Next Fifteen Communications Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can click on the image below to see (in greater detail) how Next Fifteen Communications Group'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Next Fifteen Communications Group.

Do Next Fifteen Communications Group's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Next Fifteen Communications Group has total assets of UK£242m and current liabilities of UK£77m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Next Fifteen Communications Group has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Next Fifteen Communications Group's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Next Fifteen Communications Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.