Why The SimplyBiz Group plc’s (LON:SBIZ) Return On Capital Employed Looks Uninspiring
Today we'll look at The SimplyBiz Group plc (LON:SBIZ) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. 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?
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 SimplyBiz Group:
0.10 = UK£12m ÷ (UK£131m - UK£19m) (Based on the trailing twelve months to June 2019.)
So, SimplyBiz Group has an ROCE of 10%.
Check out our latest analysis for SimplyBiz Group
Is SimplyBiz Group's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, SimplyBiz Group's ROCE appears meaningfully below the 20% average reported by the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how SimplyBiz Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
SimplyBiz Group's current ROCE of 10% is lower than 3 years ago, when the company reported a 31% ROCE. So investors might consider if it has had issues recently. You can see in the image below how SimplyBiz Group's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do SimplyBiz Group's Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
SimplyBiz Group has total liabilities of UK£19m and total assets of UK£131m. As a result, its current liabilities are equal to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On SimplyBiz Group's ROCE
Overall, SimplyBiz Group has a decent ROCE and could be worthy of further research. SimplyBiz 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 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.
