In This Article:
Today we are going to look at Alfio Bardolla Training Group S.p.A. (BIT:ABTG) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Alfio Bardolla Training Group:
0.022 = €175k ÷ (€9.6m - €1.8m) (Based on the trailing twelve months to June 2018.)
So, Alfio Bardolla Training Group has an ROCE of 2.2%.
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Is Alfio Bardolla Training Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Alfio Bardolla Training Group's ROCE appears meaningfully below the 11% average reported by the Consumer Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Alfio Bardolla Training Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. Readers may wish to look for more rewarding investments.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Alfio Bardolla Training Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.