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Today we'll evaluate ADDvise Group AB (publ) (STO:ADDV A) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Ultimately, it is a useful but imperfect metric. 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)

0.08 = kr19m ÷ (kr360m - kr126m) (Based on the trailing twelve months to December 2019.)

Therefore, ADDvise Group has an ROCE of 8.0%.

See our latest analysis for ADDvise Group

### Does ADDvise Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see ADDvise Group's ROCE is around the 8.0% average reported by the Medical Equipment industry. Separate from ADDvise Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that, ADDvise Group currently has an ROCE of 8.0% compared to its ROCE 3 years ago, which was 1.8%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how ADDvise Group'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. 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 ADDvise Group.

### Do ADDvise Group's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

ADDvise Group has total assets of kr360m and current liabilities of kr126m. As a result, its current liabilities are equal to approximately 35% of its total assets. ADDvise Group has a middling amount of current liabilities, increasing its ROCE somewhat.

### What We Can Learn From ADDvise Group's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than ADDvise Group 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.