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Is Alcadon Group AB (publ) (STO:ALCA) Investing Effectively In Its Business?

Simply Wall St

Today we are going to look at Alcadon Group AB (publ) (STO:ALCA) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Alcadon Group:

0.095 = kr31m ÷ (kr451m - kr123m) (Based on the trailing twelve months to December 2019.)

Therefore, Alcadon Group has an ROCE of 9.5%.

See our latest analysis for Alcadon Group

Is Alcadon Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Alcadon Group's ROCE is around the 11% average reported by the Electronic industry. Separate from Alcadon Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that, Alcadon Group currently has an ROCE of 9.5%, less than the 17% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Alcadon Group's ROCE compares to its industry. Click to see more on past growth.

OM:ALCA Past Revenue and Net Income, March 5th 2020

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. 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.

Alcadon Group's Current Liabilities And Their Impact On 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. 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.

Alcadon Group has current liabilities of kr123m and total assets of kr451m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On Alcadon Group's ROCE

With that in mind, Alcadon Group's ROCE appears pretty good. Alcadon Group 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.

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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.