How Do HELLA GmbH & Co. KGaA’s (FRA:HLE) Returns Compare To Its Industry?
Today we’ll look at HELLA GmbH & Co. KGaA (FRA:HLE) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. Finally, we’ll look at how its current liabilities affect 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. 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?
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 HELLA GmbH KGaA:
0.13 = €537m ÷ (€5.9b – €1.5b) (Based on the trailing twelve months to August 2018.)
Therefore, HELLA GmbH KGaA has an ROCE of 13%.
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Is HELLA GmbH KGaA’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, HELLA GmbH KGaA’s ROCE is meaningfully higher than the 9.4% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how HELLA GmbH KGaA compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
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.
Do HELLA GmbH KGaA’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
HELLA GmbH KGaA has total liabilities of €1.5b and total assets of €5.9b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On HELLA GmbH KGaA’s ROCE
Overall, HELLA GmbH KGaA has a decent ROCE and could be worthy of further research. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
