Today we are going to look at Atlantia S.p.A. (BIT:ATL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Atlantia:
0.049 = €3.3b ÷ (€79b - €12b) (Based on the trailing twelve months to June 2019.)
So, Atlantia has an ROCE of 4.9%.
See our latest analysis for Atlantia
Does Atlantia Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Atlantia's ROCE is meaningfully below the Infrastructure industry average of 9.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Atlantia's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Atlantia's current ROCE of 4.9% is lower than 3 years ago, when the company reported a 7.1% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Atlantia's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Atlantia.
Do Atlantia's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.