Today we'll evaluate Siemens Gamesa Renewable Energy, S.A. (BME:SGRE) 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 up, we'll look at what ROCE is and how we calculate it. 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 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. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Siemens Gamesa Renewable Energy:
0.041 = €362m ÷ (€16b - €7.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Siemens Gamesa Renewable Energy has an ROCE of 4.1%.
Is Siemens Gamesa Renewable Energy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Siemens Gamesa Renewable Energy's ROCE appears meaningfully below the 11% average reported by the Electrical industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Siemens Gamesa Renewable Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Siemens Gamesa Renewable Energy's current ROCE of 4.1% is lower than 3 years ago, when the company reported a 32% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Siemens Gamesa Renewable Energy's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Siemens Gamesa Renewable Energy.
Siemens Gamesa Renewable Energy's Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Siemens Gamesa Renewable Energy has total assets of €16b and current liabilities of €7.4b. As a result, its current liabilities are equal to approximately 45% of its total assets. Siemens Gamesa Renewable Energy has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
Our Take On Siemens Gamesa Renewable Energy's ROCE
So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Siemens Gamesa Renewable Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Siemens Gamesa Renewable Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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.