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Here's What Pfeiffer Vacuum Technology AG's (FRA:PFV) ROCE Can Tell Us

Simply Wall St

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Today we are going to look at Pfeiffer Vacuum Technology AG (FRA:PFV) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from 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 Pfeiffer Vacuum Technology:

0.19 = €93m ÷ (€624m - €131m) (Based on the trailing twelve months to December 2018.)

Therefore, Pfeiffer Vacuum Technology has an ROCE of 19%.

View our latest analysis for Pfeiffer Vacuum Technology

Is Pfeiffer Vacuum Technology's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Pfeiffer Vacuum Technology's ROCE appears to be substantially greater than the 9.8% average in the Machinery industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Pfeiffer Vacuum Technology's ROCE in absolute terms currently looks quite high.

DB:PFV Past Revenue and Net Income, April 8th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Pfeiffer Vacuum Technology's 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 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.

Pfeiffer Vacuum Technology has total liabilities of €131m and total assets of €624m. As a result, its current liabilities are equal to approximately 21% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

Our Take On Pfeiffer Vacuum Technology's ROCE

Low current liabilities and high ROCE is a good combination, making Pfeiffer Vacuum Technology look quite interesting. You might be able to find a better buy than Pfeiffer Vacuum Technology. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.