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Don’t Buy Polytec Holding AG (VIE:PYT) Until You Understand Its ROCE

Lacy Summers

Today we’ll evaluate Polytec Holding AG (VIE:PYT) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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’.

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 Polytec Holding:

0.13 = €59m ÷ (€508m – €157m) (Based on the trailing twelve months to September 2018.)

Therefore, Polytec Holding has an ROCE of 13%.

Check out our latest analysis for Polytec Holding

Does Polytec Holding Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Polytec Holding’s ROCE is fairly close to the Auto Components industry average of 12%. Regardless of where Polytec Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

As we can see, Polytec Holding currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 9.3%. This makes us think the business might be improving.

WBAG:PYT Last Perf January 28th 19

It is important to remember that ROCE shows past performance, and is 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. 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 Polytec Holding.

What Are Current Liabilities, And How Do They Affect Polytec 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Polytec Holding has total assets of €508m and current liabilities of €157m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Polytec Holding has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Polytec Holding’s ROCE

Polytec Holding’s ROCE does look good, but the level of current liabilities also contribute to that. But note: Polytec Holding may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.