Today we are going to look at TAS Tecnologia Avanzata dei Sistemi S.p.A. (BIT:TAS) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
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 TAS Tecnologia Avanzata dei Sistemi:
0.041 = €1.8m ÷ (€80m – €35m) (Based on the trailing twelve months to March 2019.)
Therefore, TAS Tecnologia Avanzata dei Sistemi has an ROCE of 4.1%.
Does TAS Tecnologia Avanzata dei Sistemi Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, TAS Tecnologia Avanzata dei Sistemi’s ROCE appears meaningfully below the 9.1% average reported by the Software industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside TAS Tecnologia Avanzata dei Sistemi’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
TAS Tecnologia Avanzata dei Sistemi reported an ROCE of 4.1% — better than 3 years ago, when the company didn’t make a profit. That implies the business has been improving.
When considering this metric, keep in mind that it is backwards looking, and 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. 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.
TAS Tecnologia Avanzata dei Sistemi’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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
TAS Tecnologia Avanzata dei Sistemi has total assets of €80m and current liabilities of €35m. As a result, its current liabilities are equal to approximately 44% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, TAS Tecnologia Avanzata dei Sistemi’s ROCE is concerning.
Our Take On TAS Tecnologia Avanzata dei Sistemi’s ROCE
There are likely better investments out there. You might be able to find a better investment than TAS Tecnologia Avanzata dei Sistemi. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.
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