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Today we'll look at Polaris Media ASA (OB:POL) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
How Do You Calculate Return On Capital Employed?
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 Polaris Media:
0.026 = øre66m ÷ (øre3.0b - øre459m) (Based on the trailing twelve months to March 2019.)
Therefore, Polaris Media has an ROCE of 2.6%.
View our latest analysis for Polaris Media
Is Polaris Media's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Polaris Media's ROCE appears to be significantly below the 9.8% average in the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Polaris Media stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
We can see that , Polaris Media currently has an ROCE of 2.6% compared to its ROCE 3 years ago, which was 0.3%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Polaris Media's ROCE compares to its industry, and you can click it to see more detail on its 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. You can check if Polaris Media has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.