Yahoo Finance Is Sportscene Group Inc.'s (CVE:SPS.A) Capital Allocation Ability Worth Your Time?
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Today we'll evaluate Sportscene Group Inc. (CVE:SPS.A) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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?
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 Sportscene Group:
0.086 = CA$4.9m ÷ (CA$74m - CA$17m) (Based on the trailing twelve months to November 2018.)
Therefore, Sportscene Group has an ROCE of 8.6%.
View our latest analysis for Sportscene Group
Is Sportscene Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Sportscene Group's ROCE is around the 9.9% average reported by the Hospitality industry. Separate from how Sportscene Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Sportscene Group has an ROCE of 8.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
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 Sportscene Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Sportscene Group's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sportscene Group has total liabilities of CA$17m and total assets of CA$74m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Sportscene Group's ROCE
If Sportscene Group continues to earn an uninspiring ROCE, there may be better places to invest. Of course you might be able to find a better stock than Sportscene Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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. Thank you for reading.
