Today we are going to look at Allgäuer Brauhaus AG (MUN:ALB) to see whether it might be an attractive investment prospect. 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.
Firstly, 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.
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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Allgäuer Brauhaus:
0.15 = €1.2m ÷ (€15m - €7.2m) (Based on the trailing twelve months to December 2018.)
Therefore, Allgäuer Brauhaus has an ROCE of 15%.
Does Allgäuer Brauhaus Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Allgäuer Brauhaus's ROCE appears to be substantially greater than the 8.3% average in the Beverage industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Allgäuer Brauhaus sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Allgäuer Brauhaus has an ROCE of 15%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how Allgäuer Brauhaus's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Allgäuer Brauhaus is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Allgäuer Brauhaus's Current Liabilities Skew 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Allgäuer Brauhaus has total liabilities of €7.2m and total assets of €15m. As a result, its current liabilities are equal to approximately 47% of its total assets. Allgäuer Brauhaus has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Allgäuer Brauhaus's ROCE
Allgäuer Brauhaus's ROCE does look good, but the level of current liabilities also contribute to that. Allgäuer Brauhaus 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. Thank you for reading.