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Evaluating Koenig & Bauer AG’s (ETR:SKB) Investments In Its Business

Simply Wall St

Today we'll evaluate Koenig & Bauer AG (ETR:SKB) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Koenig & Bauer:

0.094 = €61m ÷ (€1.2b - €589m) (Based on the trailing twelve months to June 2019.)

So, Koenig & Bauer has an ROCE of 9.4%.

Check out our latest analysis for Koenig & Bauer

Does Koenig & Bauer Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Koenig & Bauer's ROCE is around the 9.4% average reported by the Machinery industry. Regardless of where Koenig & Bauer sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can click on the image below to see (in greater detail) how Koenig & Bauer's past growth compares to other companies.

XTRA:SKB Past Revenue and Net Income, October 16th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Koenig & Bauer's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Koenig & Bauer has total liabilities of €589m and total assets of €1.2b. As a result, its current liabilities are equal to approximately 47% of its total assets. Koenig & Bauer has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Koenig & Bauer's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Koenig & Bauer 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 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.