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Today we'll evaluate Bayerische Motoren Werke Aktiengesellschaft (FRA:BMW) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. 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?
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 Bayerische Motoren Werke:
0.047 = €6.8b ÷ (€221b - €77b) (Based on the trailing twelve months to March 2019.)
Therefore, Bayerische Motoren Werke has an ROCE of 4.7%.
Does Bayerische Motoren Werke Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Bayerische Motoren Werke's ROCE appears to be around the 5.2% average of the Auto industry. Setting aside the industry comparison for now, Bayerische Motoren Werke's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that , Bayerische Motoren Werke currently has an ROCE of 4.7%, less than the 8.4% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Bayerische Motoren Werke's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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.
Bayerische Motoren Werke's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Bayerische Motoren Werke has total liabilities of €77b and total assets of €221b. As a result, its current liabilities are equal to approximately 35% of its total assets. Bayerische Motoren Werke's ROCE is improved somewhat by its moderate amount of current liabilities.
The Bottom Line On Bayerische Motoren Werke's ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 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.