Re: Quality at a Reasonable Price
Posted: February 26th, 2024, 10:49 am
doug2500 wrote:On ROCE you may be interested in this:
https://knowledge.sharescope.co.uk/2024 ... rformance/
Hi doug,
I was thinking about using adjustments to ROCE a bit more. I don’t think there’s much wrong with the standard calculation tbh but there are always going to be cases where the figure is distorted by one-off or temporary events. If I were to adjust the calculation for anything, I would make a case for companies with positive reasons for having an enlarged capital base, in particular a large cash holding maybe as a result of a large disposal.
I’m sure you’re probably aware of such a case in point with Oxford Metrics (OMG) which disposed of its Yotta division a couple of years ago and has excess cash on the balance sheet with the stated intention of using it for acquisitions. I think you can make a valid case that this makes the balance sheet inefficient and that the management should be making earnings enhancing acquisitions and it is right that the ROCE should be lower as a result. However, in the meantime the cash is hiding the profitability of the underlying business and the cash free ROCE is far higher i.e. the standard ROCE is 5.6% and if you remove the cash from the capital employed, it is 24.6%. A big difference.
All the best, Si
All the best, Si