Today we'll look at G5 Entertainment AB (publ) (STO:G5EN) and reflect on its potential as an investment. 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.
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 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. Ultimately, it is a useful but imperfect metric. 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 G5 Entertainment:
0.34 = kr137m ÷ (kr607m - kr204m) (Based on the trailing twelve months to March 2019.)
Therefore, G5 Entertainment has an ROCE of 34%.
Is G5 Entertainment's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, G5 Entertainment's ROCE is meaningfully higher than the 19% average in the Entertainment 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, G5 Entertainment's ROCE is currently very good.
In our analysis, G5 Entertainment's ROCE appears to be 34%, compared to 3 years ago, when its ROCE was 26%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how G5 Entertainment's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for G5 Entertainment.
How G5 Entertainment'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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
G5 Entertainment has total assets of kr607m and current liabilities of kr204m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. G5 Entertainment's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On G5 Entertainment's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. G5 Entertainment 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.