Today we'll look at Burkhalter Holding AG (VTX:BRKN) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. Overall, it is a valuable metric that has its flaws. 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?
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 Burkhalter Holding:
0.30 = CHF29m ÷ (CHF196m - CHF99m) (Based on the trailing twelve months to June 2019.)
Therefore, Burkhalter Holding has an ROCE of 30%.
Is Burkhalter Holding's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Burkhalter Holding's ROCE is meaningfully higher than the 10% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Burkhalter Holding's ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how Burkhalter Holding's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Burkhalter Holding.
How Burkhalter Holding's Current Liabilities Impact 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Burkhalter Holding has total assets of CHF196m and current liabilities of CHF99m. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Burkhalter Holding boasts an attractive ROCE, even after considering the boost from high current liabilities.
Our Take On Burkhalter Holding's ROCE
So we would be interested in doing more research here -- there may be an opportunity! Burkhalter Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.
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