Today we'll evaluate Hamburger Hafen und Logistik Aktiengesellschaft (ETR:HHFA) to determine whether it could have potential as an investment idea. 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, 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Hamburger Hafen und Logistik:
0.086 = €204m ÷ (€2.7b - €280m) (Based on the trailing twelve months to September 2019.)
Therefore, Hamburger Hafen und Logistik has an ROCE of 8.6%.
Does Hamburger Hafen und Logistik Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Hamburger Hafen und Logistik's ROCE is fairly close to the Infrastructure industry average of 8.9%. Separate from Hamburger Hafen und Logistik's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how Hamburger Hafen und Logistik's past growth compares to other companies.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Hamburger Hafen und Logistik's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Hamburger Hafen und Logistik has total assets of €2.7b and current liabilities of €280m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Hamburger Hafen und Logistik's ROCE
Overall, Hamburger Hafen und Logistik has a decent ROCE and could be worthy of further research. There might be better investments than Hamburger Hafen und Logistik out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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If you spot an error that warrants correction, please contact the editor at email@example.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.
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