Today we’ll evaluate TAS Tecnologia Avanzata dei Sistemi S.p.A. (BIT:TAS) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
What is 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. All else being equal, a better business will have a higher ROCE. 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 TAS Tecnologia Avanzata dei Sistemi:
0.047 = €2.1m ÷ (€69m – €23m) (Based on the trailing twelve months to September 2019.)
Therefore, TAS Tecnologia Avanzata dei Sistemi has an ROCE of 4.7%.
Does TAS Tecnologia Avanzata dei Sistemi Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, TAS Tecnologia Avanzata dei Sistemi’s ROCE appears to be significantly below the 6.4% average in the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how TAS Tecnologia Avanzata dei Sistemi stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
TAS Tecnologia Avanzata dei Sistemi has an ROCE of 4.7%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how TAS Tecnologia Avanzata dei Sistemi’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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is TAS Tecnologia Avanzata dei Sistemi? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How TAS Tecnologia Avanzata dei Sistemi’s Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
TAS Tecnologia Avanzata dei Sistemi has total assets of €69m and current liabilities of €23m. As a result, its current liabilities are equal to approximately 34% of its total assets. TAS Tecnologia Avanzata dei Sistemi has a medium level of current liabilities, which would boost its ROCE somewhat.
Our Take On TAS Tecnologia Avanzata dei Sistemi’s ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might also be able to find a better stock than TAS Tecnologia Avanzata dei Sistemi. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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