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# ASSA ABLOY AB (publ) (STO:ASSA B) Earns A Nice Return On Capital Employed

Today we'll evaluate ASSA ABLOY AB (publ) (STO:ASSA B) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) Ã· (Total Assets - Current Liabilities)

Or for ASSA ABLOY:

0.14 = kr12b Ã· (kr115b - kr30b) (Based on the trailing twelve months to March 2019.)

Therefore, ASSA ABLOY has an ROCE of 14%.

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### Is ASSA ABLOY's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that ASSA ABLOY's ROCE is meaningfully better than the 11% average in the Building industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how ASSA ABLOY compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for ASSA ABLOY.

### How ASSA ABLOY's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

ASSA ABLOY has total assets of kr115b and current liabilities of kr30b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

### Our Take On ASSA ABLOY's ROCE

This is good to see, and with a sound ROCE, ASSA ABLOY could be worth a closer look. ASSA ABLOY shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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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.