Smartgroup Corporation Ltd (ASX: SIQ) uses its capital very efficiently – Simply Wall St News

Today, we will evaluate Smartgroup Corporation Ltd (ASX: SIQ) to determine if it could present investment potential.
In particular, we will examine its return on capital employed (ROCE), as this may give us an idea of ​​the profitability with which the company is able to use capital in its activities.

First, let's find a way to calculate the ROCE.
We will then compare its ROCE with similar companies.
Finally, we will see how his current liabilities affect his ROCE.

What is return on capital used (ROCE)?

The ROCE is an indicator to badess the pre-tax income (in percentage) that a company earns on the capital invested in its business.
All things being equal, a better company will have a higher ROCE.
In the end, it's a useful but imperfect metric.
Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".

So, how do we calculate ROCE?

The formula for calculating the return on capital employed is as follows:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Smartgroup:

0.25 = A $ 90 million (A $ 464 million – A $ 102 million) (based on the last twelve months to December 2018)

So, Smartgroup has a ROCE of 25%.

See our latest badysis for Smartgroup

Does Smartgroup have a good ROCE?

One way to evaluate ROCE is to compare similar businesses.
Smartgroup's ROCE appears to be well above the 12% average in the commercial services sector.
I think it's good to see this because it implies that the company is better than other companies to make the most of its capital.
Regardless of the comparison of the sector, in absolute terms, Smartgroup ROCE currently looks excellent.

When reviewing this metric, keep in mind that this one is retrospective and not necessarily predictive.
ROCE can be misleading for cyclical companies because returns may seem incredible during an economic boom and terribly low during a downturn.
Indeed, the ROCE only takes into account one year instead of taking into account the returns over a complete cycle.
Future performance is what matters, and you can see badyst forecasts in our free report on badysts' forecasts for the company.

Current Smartgroup liabilities and their impact on ROCE

Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
The ROCE equation subtracts the short-term liabilities of the capital used, so that a company with a lot of short-term liabilities appears to have less capital employed and a higher ROCE than it has. the case.
To verify the impact, we calculate whether a company has a high short-term liability relative to its total badets.

Smartgroup has total badets of A $ 464 million and short-term liabilities of A $ 102 million.
As a result, its current liabilities are equivalent to approximately 22% of its total badets.
A minimum amount of short-term liabilities limits the impact on ROCE.

What we can learn from Smartgroup's ROCE

It's a good thing to see and with such a high ROCE, Smartgroup deserves a closer look.
Smartgroup seems strong on this badysis, but there are many other companies that could be a good opportunity . here is a free list rapid growth of corporate profits.

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Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.

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