Today we'll evaluate Adval Tech Holding AG (VTX:ADVN) to determine whether it could have potential as an investment idea. 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Adval Tech Holding:
0.091 = CHF12m ÷ (CHF174m - CHF46m) (Based on the trailing twelve months to June 2019.)
So, Adval Tech Holding has an ROCE of 9.1%.
Is Adval Tech Holding's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Adval Tech Holding's ROCE appears to be significantly below the 14% average in the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Adval Tech Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Adval Tech Holding's current ROCE of 9.1% is lower than 3 years ago, when the company reported a 14% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Adval Tech Holding's past growth compares to other companies.
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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Adval Tech Holding.
How Adval Tech Holding's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Adval Tech Holding has total liabilities of CHF46m and total assets of CHF174m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Adval Tech Holding's ROCE
This is good to see, and with a sound ROCE, Adval Tech Holding could be worth a closer look. Adval Tech Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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 firstname.lastname@example.org. 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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