Evaluating Kakel Max AB (publ)’s (STO:KAKEL) Investments In Its Business
Today we'll look at Kakel Max AB (publ) (STO:KAKEL) and reflect on its potential as an investment. 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, we'll go over how we 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Kakel Max:
0.12 = kr6.6m ÷ (kr84m - kr27m) (Based on the trailing twelve months to December 2018.)
So, Kakel Max has an ROCE of 12%.
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Does Kakel Max Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Kakel Max's ROCE is around the 14% average reported by the Trade Distributors industry. Regardless of where Kakel Max sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Kakel Max's current ROCE of 12% is lower than 3 years ago, when the company reported a 20% ROCE. This makes us wonder if the business is facing new challenges.
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. You can check if Kakel Max has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Kakel Max'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Kakel Max has total assets of kr84m and current liabilities of kr27m. As a result, its current liabilities are equal to approximately 32% of its total assets. Kakel Max has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Kakel Max's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Kakel Max 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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. Thank you for reading.
