Yahoo Finance Is The Citadel Group Limited’s (ASX:CGL) 24% ROCE Any Good?
Today we’ll look at The Citadel Group Limited (ASX:CGL) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Citadel Group:
0.24 = AU$26m ÷ (AU$142m – AU$36m) (Based on the trailing twelve months to December 2018.)
Therefore, Citadel Group has an ROCE of 24%.
View our latest analysis for Citadel Group
Is Citadel Group’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Citadel Group’s ROCE is meaningfully better than the 13% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Citadel Group’s ROCE is currently very good.
Our data shows that Citadel Group currently has an ROCE of 24%, compared to its ROCE of 18% 3 years ago. This makes us wonder if the company is improving.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Citadel Group.
Do Citadel Group’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Citadel Group has total assets of AU$142m and current liabilities of AU$36m. As a result, its current liabilities are equal to approximately 25% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.
Our Take On Citadel Group’s ROCE
With low current liabilities and a high ROCE, Citadel Group could be worthy of further investigation. But note: Citadel Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.
