Is Secuoya, Grupo de Comunicación, S.A. (BME:SEC) Investing Your Capital Efficiently?

Today we'll look at Secuoya, Grupo de Comunicación, S.A. (BME:SEC) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. Overall, it is a valuable metric that has its flaws. 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?

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 Secuoya Grupo de Comunicación:

0.039 = €1.7m ÷ (€76m - €31m) (Based on the trailing twelve months to December 2018.)

So, Secuoya Grupo de Comunicación has an ROCE of 3.9%.

View our latest analysis for Secuoya Grupo de Comunicación

Is Secuoya Grupo de Comunicación's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Secuoya Grupo de Comunicación's ROCE appears to be significantly below the 9.4% average in the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Secuoya Grupo de Comunicación's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Secuoya Grupo de Comunicación's current ROCE of 3.9% is lower than 3 years ago, when the company reported a 5.4% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Secuoya Grupo de Comunicación's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. If Secuoya Grupo de Comunicación is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Secuoya Grupo de Comunicación's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Secuoya Grupo de Comunicación has current liabilities of €31m and total assets of €76m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. Secuoya Grupo de Comunicación has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Secuoya Grupo de Comunicación's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might also be able to find a better stock than Secuoya Grupo de Comunicación. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.