Today we'll look at Huhtamäki Oyj (HEL:HUH1V) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. 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.
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 Huhtamäki Oyj:
0.11 = €255m ÷ (€3.5b - €1.1b) (Based on the trailing twelve months to September 2019.)
Therefore, Huhtamäki Oyj has an ROCE of 11%.
Does Huhtamäki Oyj Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Huhtamäki Oyj's ROCE appears to be around the 11% average of the Packaging industry. Separate from Huhtamäki Oyj's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how Huhtamäki Oyj's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Huhtamäki Oyj.
Do Huhtamäki Oyj'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 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.
Huhtamäki Oyj has current liabilities of €1.1b and total assets of €3.5b. As a result, its current liabilities are equal to approximately 31% of its total assets. With this level of current liabilities, Huhtamäki Oyj's ROCE is boosted somewhat.
What We Can Learn From Huhtamäki Oyj's ROCE
Huhtamäki Oyj's ROCE does look good, but the level of current liabilities also contribute to that. Huhtamäki Oyj 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.
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 email@example.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.
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