Today we are going to look at Hawesko Holding AG (ETR:HAW) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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.
How Do You Calculate Return On Capital Employed?
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 Hawesko Holding:
0.11 = €23m ÷ (€368m - €148m) (Based on the trailing twelve months to September 2019.)
So, Hawesko Holding has an ROCE of 11%.
Does Hawesko Holding Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Hawesko Holding's ROCE appears to be substantially greater than the 8.8% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Hawesko Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Hawesko Holding currently has an ROCE of 11%, less than the 26% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Hawesko Holding's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hawesko Holding.
What Are Current Liabilities, And How Do They Affect Hawesko Holding's 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Hawesko Holding has total assets of €368m and current liabilities of €148m. Therefore its current liabilities are equivalent to approximately 40% of its total assets. Hawesko Holding has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Hawesko Holding's ROCE
Hawesko Holding's ROCE does look good, but the level of current liabilities also contribute to that. Hawesko Holding 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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