Today we'll evaluate Elecster Oyj (HEL:ELEAV) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Elecster Oyj:
0.089 = €3.4m ÷ (€51m - €13m) (Based on the trailing twelve months to March 2019.)
So, Elecster Oyj has an ROCE of 8.9%.
Does Elecster Oyj Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Elecster Oyj's ROCE is meaningfully below the Machinery industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of where Elecster Oyj sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Elecster Oyj's current ROCE of 8.9% is lower than 3 years ago, when the company reported a 13% ROCE. So investors might consider if it has had issues recently. The image below shows how Elecster Oyj'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, after all, simply a snap shot of a single year. You can check if Elecster Oyj has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Elecster Oyj'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Elecster Oyj has total assets of €51m and current liabilities of €13m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Elecster Oyj's ROCE
Overall, Elecster Oyj has a decent ROCE and could be worthy of further research. Elecster Oyj 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.