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Should Capacent Holding AB (publ)’s (STO:CAPAC) Weak Investment Returns Worry You?

Simply Wall St

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Today we'll evaluate Capacent Holding AB (publ) (STO:CAPAC) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.'

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 Capacent Holding:

0.11 = kr16m ÷ (kr216m - kr72m) (Based on the trailing twelve months to March 2019.)

So, Capacent Holding has an ROCE of 11%.

View our latest analysis for Capacent Holding

Does Capacent Holding Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Capacent Holding's ROCE appears meaningfully below the 14% average reported by the Professional Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of where Capacent Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Capacent Holding's current ROCE of 11% is lower than 3 years ago, when the company reported a 15% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Capacent Holding's ROCE compares to its industry. Click to see more on past growth.

OM:CAPAC Past Revenue and Net Income, July 16th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Capacent Holding.

What Are Current Liabilities, And How Do They Affect Capacent Holding's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Capacent Holding has total assets of kr216m and current liabilities of kr72m. As a result, its current liabilities are equal to approximately 33% of its total assets. Capacent Holding has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On Capacent Holding's ROCE

Capacent Holding's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Capacent Holding out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.