Should You Worry About iGrandiViaggi S.p.A.’s (BIT:IGV) ROCE?
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Today we are going to look at iGrandiViaggi S.p.A. (BIT:IGV) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. 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 ‘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.’
How Do You Calculate Return On Capital Employed?
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 iGrandiViaggi:
0.024 = €2.3m ÷ (€117m – €24m) (Based on the trailing twelve months to October 2018.)
Therefore, iGrandiViaggi has an ROCE of 2.4%.
See our latest analysis for iGrandiViaggi
Is iGrandiViaggi’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, iGrandiViaggi’s ROCE appears to be significantly below the 8.4% average in the Hospitality industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside iGrandiViaggi’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
iGrandiViaggi has an ROCE of 2.4%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, 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 iGrandiViaggi.
iGrandiViaggi’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
iGrandiViaggi has total assets of €117m and current liabilities of €24m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On iGrandiViaggi’s ROCE
While that is good to see, iGrandiViaggi has a low ROCE and does not look attractive in this analysis. Of course you might be able to find a better stock than iGrandiViaggi. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
