Today we'll evaluate StrongPoint ASA (OB:STRONG) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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)
Or for StrongPoint:
0.12 = kr40m ÷ (kr690m - kr344m) (Based on the trailing twelve months to September 2019.)
Therefore, StrongPoint has an ROCE of 12%.
Is StrongPoint's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, StrongPoint's ROCE appears to be around the 12% average of the Electronic industry. Regardless of where StrongPoint sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, StrongPoint currently has an ROCE of 12%, less than the 21% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how StrongPoint's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
StrongPoint's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
StrongPoint has total assets of kr690m and current liabilities of kr344m. As a result, its current liabilities are equal to approximately 50% of its total assets. StrongPoint has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On StrongPoint's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. StrongPoint 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.
StrongPoint is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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