Why We Like Facephi Biometria, S.A.’s (BME:FACE) 26% Return On Capital Employed
Today we'll look at Facephi Biometria, S.A. (BME:FACE) 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.
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 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. 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?
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 Facephi Biometria:
0.26 = €849k ÷ (€6.6m - €3.3m) (Based on the trailing twelve months to December 2018.)
Therefore, Facephi Biometria has an ROCE of 26%.
See our latest analysis for Facephi Biometria
Does Facephi Biometria Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Facephi Biometria's ROCE is meaningfully better than the 10% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Facephi Biometria's ROCE is currently very good.
Facephi Biometria reported an ROCE of 26% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Facephi Biometria's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Facephi Biometria's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Facephi Biometria has current liabilities of €3.3m and total assets of €6.6m. As a result, its current liabilities are equal to approximately 51% of its total assets. Facephi Biometria's high level of current liabilities boost the ROCE - but its ROCE is still impressive.
Our Take On Facephi Biometria's ROCE
In my book, this business could be worthy of further research. There might be better investments than Facephi Biometria out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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