Today we'll look at B3 Consulting Group AB (publ) (STO:B3) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Overall, it is a valuable metric that has its flaws. 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 B3 Consulting Group:
0.14 = kr39m ÷ (kr524m - kr243m) (Based on the trailing twelve months to September 2019.)
Therefore, B3 Consulting Group has an ROCE of 14%.
Is B3 Consulting Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, B3 Consulting Group's ROCE appears meaningfully below the 20% average reported by the IT industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how B3 Consulting Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
B3 Consulting Group's current ROCE of 14% is lower than its ROCE in the past, which was 40%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how B3 Consulting Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for B3 Consulting Group.
How B3 Consulting Group'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.
B3 Consulting Group has total liabilities of kr243m and total assets of kr524m. As a result, its current liabilities are equal to approximately 46% of its total assets. With this level of current liabilities, B3 Consulting Group's ROCE is boosted somewhat.
Our Take On B3 Consulting Group's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. B3 Consulting Group 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.
I will like B3 Consulting Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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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