XLMedia PLC (LON:XLM) Is Employing Capital Very Effectively
Today we are going to look at XLMedia PLC (LON:XLM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 XLMedia:
0.19 = US$32m ÷ (US$200m - US$29m) (Based on the trailing twelve months to June 2019.)
So, XLMedia has an ROCE of 19%.
View our latest analysis for XLMedia
Does XLMedia Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that XLMedia's ROCE is meaningfully better than the 14% average in the Interactive Media and Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, XLMedia's ROCE in absolute terms currently looks quite high.
XLMedia's current ROCE of 19% is lower than its ROCE in the past, which was 28%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how XLMedia'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.
XLMedia's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
XLMedia has total liabilities of US$29m and total assets of US$200m. As a result, its current liabilities are equal to approximately 15% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From XLMedia's ROCE
Low current liabilities and high ROCE is a good combination, making XLMedia look quite interesting. XLMedia 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.
XLMedia is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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.
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