Why You Should Care About One More Level S.A.’s (WSE:OML) Low Return On Capital

Simply Wall St

Today we'll look at One More Level S.A. (WSE:OML) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.'

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 One More Level:

0.0077 = zł278k ÷ (zł39m - zł2.6m) (Based on the trailing twelve months to September 2018.)

So, One More Level has an ROCE of 0.8%.

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Does One More Level Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see One More Level's ROCE is meaningfully below the Entertainment industry average of 28%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how One More Level stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

WSE:OML Past Revenue and Net Income, May 23rd 2019

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

One More Level's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

One More Level has total assets of zł39m and current liabilities of zł2.6m. As a result, its current liabilities are equal to approximately 6.7% of its total assets. One More Level has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On One More Level's ROCE

Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better investment than One More Level. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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

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.