U.S. Markets open in 8 hrs 49 mins

Does Boliden AB (publ) (STO:BOL) Create Value For Shareholders?

Simply Wall St

Today we'll look at Boliden AB (publ) (STO:BOL) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. In brief, it is a useful tool, but it is not without drawbacks. 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'.

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 Boliden:

0.14 = kr7.7b ÷ (kr63b - kr10b) (Based on the trailing twelve months to September 2019.)

Therefore, Boliden has an ROCE of 14%.

View our latest analysis for Boliden

Does Boliden Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Boliden's ROCE is around the 14% average reported by the Metals and Mining industry. Separate from Boliden's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Boliden currently has an ROCE of 14%, compared to its ROCE of 8.6% 3 years ago. This makes us think the business might be improving. The image below shows how Boliden's ROCE compares to its industry, and you can click it to see more detail on its past growth.

OM:BOL Past Revenue and Net Income, January 12th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Boliden could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Boliden.

How Boliden'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.

Boliden has total liabilities of kr10b and total assets of kr63b. Therefore its current liabilities are equivalent to approximately 16% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Boliden's ROCE

This is good to see, and with a sound ROCE, Boliden could be worth a closer look. Boliden 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.

Boliden is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.