Today we are going to look at Brødrene Hartmann A/S (CPH:HART) 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.
First of all, we'll work out how to 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Brødrene Hartmann:
0.11 = ø164m ÷ (ø2.0b - ø467m) (Based on the trailing twelve months to June 2019.)
So, Brødrene Hartmann has an ROCE of 11%.
Is Brødrene Hartmann's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Brødrene Hartmann's ROCE appears to be around the 11% average of the Packaging industry. Regardless of where Brødrene Hartmann sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Brødrene Hartmann's current ROCE of 11% is lower than its ROCE in the past, which was 19%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Brødrene Hartmann'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. 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 only a point-in-time measure. How cyclical is Brødrene Hartmann? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Brødrene Hartmann'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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Brødrene Hartmann has total liabilities of ø467m and total assets of ø2.0b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Brødrene Hartmann's ROCE
With that in mind, Brødrene Hartmann's ROCE appears pretty good. Brødrene Hartmann 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.