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Today, we will review the Colonial Motor Company Limited (NZSE: CMO) to determine if it could constitute an attractive investment prospect. To be more precise, we will consider its return on capital employed (ROCE), as this will inform our vision of the quality of the company.
First, let's find a way to calculate the ROCE. Then we will compare it to others in his sector. Finally, we will examine the impact of its current liabilities on its ROCE.
Return on Capital Employed (ROCE): What is it?
The ROCE is an indicator to badess the pre-tax income (in percentage) that a company earns on the capital invested in its business. In general, companies with a higher ROCE are generally better. Overall, it's a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin suggested that a high ROCE could indicate that "a dollar invested in society generates more than a dollar".
How do you calculate the return on capital employed?
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 colonial engine:
0.20 = NZ $ 41 million (NZD 366 million – NZ $ 162 million) (Based on the last twelve months up to December 2018.)
So, Colonial Motor has a ROCE of 20%.
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Is the ROCE of Colonial Motor good?
ROCE is commonly used to compare the performance of similar companies. Using our data, Colonial Motor's ROCE appears to be around the 17% average for the specialty retail sector. Regardless of Colonial Motor's performance relative to its sector, its ROCE in absolute terms seems satisfactory and it may be interesting to deepen its research.
When reviewing this metric, keep in mind that this one is retrospective and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with impressive returns during boom times, but very low in times of crisis. ROCE is only a one-off measure. You can check if Colonial Motor has cyclical profits by looking at this free graph of previous revenues, revenues and cash flows.
How current liabilities of Colonial Motor affect its ROCE
Current liabilities are short-term bills and invoices that must be paid within 12 months or less. Due to the functioning of the ROCE equation, having large short-term bills can give the impression that the company is using less capital and therefore a higher ROCE than usual. To remedy this, investors can check whether a company has high current liabilities relative to total badets.
Colonial Motor has total badets of $ 366 million in New Zealand and a current liability of $ 162 million in New Zealand. As a result, its current liabilities equate to approximately 44% of its total badets. Colonial Motor has average liabilities, which increases its ROCE somewhat.
What we can learn from Colonial Motor ROCE
With a decent ROCE, the company might be interesting, but remember that the level of current liabilities makes ROCE better. Colonial Motor takes shape in this badysis, but it is far from the only company to provide excellent numbers . You may also want to check this free consolidation of companies generating excellent earnings growth.
For those who like to find winning investments this free list of growing companies recently purchased by insiders, may well be the solution.
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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