Yahoo Finance Is NetEnt AB (publ) (STO:NET B) Creating Value For Shareholders?
Today we are going to look at NetEnt AB (publ) (STO:NET B) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 NetEnt:
0.15 = kr500m ÷ (kr4.2b - kr834m) (Based on the trailing twelve months to September 2019.)
So, NetEnt has an ROCE of 15%.
See our latest analysis for NetEnt
Is NetEnt's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that NetEnt's ROCE is fairly close to the Hospitality industry average of 17%. Regardless of where NetEnt sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, NetEnt currently has an ROCE of 15%, less than the 63% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how NetEnt's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for NetEnt.
What Are Current Liabilities, And How Do They Affect NetEnt's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
NetEnt has total assets of kr4.2b and current liabilities of kr834m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On NetEnt's ROCE
Overall, NetEnt has a decent ROCE and could be worthy of further research. There might be better investments than NetEnt 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.
There are plenty of other companies that have insiders buying up shares. You probably do 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.
