Today we'll evaluate Hexatronic Group AB (publ) (STO:HTRO) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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.
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 Hexatronic Group:
0.085 = kr97m ÷ (kr1.6b - kr480m) (Based on the trailing twelve months to March 2020.)
So, Hexatronic Group has an ROCE of 8.5%.
Does Hexatronic Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Hexatronic Group's ROCE is fairly close to the Electrical industry average of 9.8%. Separate from Hexatronic Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Hexatronic Group's current ROCE of 8.5% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Hexatronic Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.
Hexatronic Group'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Hexatronic Group has total assets of kr1.6b and current liabilities of kr480m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Hexatronic Group's ROCE
Overall, Hexatronic Group has a decent ROCE and could be worthy of further research. Hexatronic Group 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.
I will like Hexatronic Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.