Today we'll look at Kewaunee Scientific Corporation (NASDAQ:KEQU) and reflect on its potential as an investment. 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 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Kewaunee Scientific:
0.043 = US$2.3m ÷ (US$87m - US$33m) (Based on the trailing twelve months to April 2019.)
So, Kewaunee Scientific has an ROCE of 4.3%.
Is Kewaunee Scientific's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Kewaunee Scientific's ROCE is meaningfully below the Medical Equipment industry average of 10%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Kewaunee Scientific's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Kewaunee Scientific's current ROCE of 4.3% is lower than its ROCE in the past, which was 12%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Kewaunee Scientific's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kewaunee Scientific.
What Are Current Liabilities, And How Do They Affect Kewaunee Scientific's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Kewaunee Scientific has total assets of US$87m and current liabilities of US$33m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Kewaunee Scientific has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
Our Take On Kewaunee Scientific's ROCE
So researching other companies may be a better use of your time. You might be able to find a better investment than Kewaunee Scientific. 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.