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Today we are going to look at Eckert & Ziegler Strahlen- und Medizintechnik AG (ETR:EUZ) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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?
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 Eckert & Ziegler Strahlen- und Medizintechnik:
0.12 = €26m ÷ (€253m - €33m) (Based on the trailing twelve months to March 2019.)
So, Eckert & Ziegler Strahlen- und Medizintechnik has an ROCE of 12%.
Is Eckert & Ziegler Strahlen- und Medizintechnik's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Eckert & Ziegler Strahlen- und Medizintechnik's ROCE is fairly close to the Medical Equipment industry average of 12%. Separate from Eckert & Ziegler Strahlen- und Medizintechnik'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 , Eckert & Ziegler Strahlen- und Medizintechnik currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 6.5%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Eckert & Ziegler Strahlen- und Medizintechnik's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Eckert & Ziegler Strahlen- und Medizintechnik's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Eckert & Ziegler Strahlen- und Medizintechnik has total liabilities of €33m and total assets of €253m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Eckert & Ziegler Strahlen- und Medizintechnik's ROCE
With that in mind, Eckert & Ziegler Strahlen- und Medizintechnik's ROCE appears pretty good. Eckert & Ziegler Strahlen- und Medizintechnik shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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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.