Today we are going to look at Boule Diagnostics AB (publ) (STO:BOUL) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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 Boule Diagnostics:
0.13 = kr50m ÷ (kr554m - kr174m) (Based on the trailing twelve months to March 2019.)
Therefore, Boule Diagnostics has an ROCE of 13%.
Is Boule Diagnostics's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Boule Diagnostics's ROCE is meaningfully better than the 7.4% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Boule Diagnostics compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Boule Diagnostics's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 10%. This makes us think the business might be improving. The image below shows how Boule Diagnostics'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 Boule Diagnostics.
How Boule Diagnostics'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.
Boule Diagnostics has total assets of kr554m and current liabilities of kr174m. As a result, its current liabilities are equal to approximately 31% of its total assets. Boule Diagnostics has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From Boule Diagnostics's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Boule Diagnostics 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.
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 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.