Today we are going to look at Positivo Tecnologia S.A. (BVMF:POSI3) 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 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 is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Positivo Tecnologia:
0.15 = R$113m ÷ (R$1.9b – R$1.1b) (Based on the trailing twelve months to September 2019.)
So, Positivo Tecnologia has an ROCE of 15%.
Does Positivo Tecnologia Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Positivo Tecnologia’s ROCE is meaningfully higher than the 8.1% average in the Tech industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Positivo Tecnologia sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Positivo Tecnologia currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 4.8%. This makes us wonder if the company is improving. You can see in the image below how Positivo Tecnologia’s ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Positivo Tecnologia.
Do Positivo Tecnologia’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Positivo Tecnologia has current liabilities of R$1.1b and total assets of R$1.9b. Therefore its current liabilities are equivalent to approximately 60% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
The Bottom Line On Positivo Tecnologia’s ROCE
While its ROCE looks decent, it wouldn’t look so good if it reduced current liabilities. Positivo Tecnologia shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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 email@example.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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