U.S. Markets close in 49 mins

Are Husqvarna AB (publ)’s (STO:HUSQ B) Returns Worth Your While?

Today we'll evaluate Husqvarna AB (publ) (STO:HUSQ B) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. 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.

Understanding 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. 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.'

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 Husqvarna:

0.14 = kr3.6b ÷ (kr39b - kr12b) (Based on the trailing twelve months to December 2018.)

So, Husqvarna has an ROCE of 14%.

Does Husqvarna Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Husqvarna's ROCE is fairly close to the Consumer Durables industry average of 15%. Regardless of where Husqvarna sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Husqvarna.

Husqvarna's Current Liabilities And Their Impact On 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.

Husqvarna has total liabilities of kr12b and total assets of kr39b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Husqvarna has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On Husqvarna's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Husqvarna 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.

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.