Today we are going to look at Hutter & Schrantz Stahlbau AG (VIE:HST) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Hutter & Schrantz Stahlbau:
0.11 = €7.1m ÷ (€83m - €17m) (Based on the trailing twelve months to December 2018.)
So, Hutter & Schrantz Stahlbau has an ROCE of 11%.
Does Hutter & Schrantz Stahlbau Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Hutter & Schrantz Stahlbau's ROCE is meaningfully higher than the 5.0% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Hutter & Schrantz Stahlbau's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that , Hutter & Schrantz Stahlbau currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 6.7%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Hutter & Schrantz Stahlbau'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. ROCE is only a point-in-time measure. How cyclical is Hutter & Schrantz Stahlbau? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Hutter & Schrantz Stahlbau's Current Liabilities Skew 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Hutter & Schrantz Stahlbau has total assets of €83m and current liabilities of €17m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Hutter & Schrantz Stahlbau's ROCE
This is good to see, and with a sound ROCE, Hutter & Schrantz Stahlbau could be worth a closer look. There might be better investments than Hutter & Schrantz Stahlbau out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Hutter & Schrantz Stahlbau 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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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. Thank you for reading.