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Do You Know About Edel SE & Co. KGaA’s (ETR:EDL) ROCE?

Simply Wall St

Today we'll look at Edel SE & Co. KGaA (ETR:EDL) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.

So, How Do We Calculate ROCE?

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 Edel SE KGaA:

0.12 = €16m ÷ (€161m - €26m) (Based on the trailing twelve months to March 2019.)

So, Edel SE KGaA has an ROCE of 12%.

See our latest analysis for Edel SE KGaA

Is Edel SE KGaA's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Edel SE KGaA's ROCE appears to be around the 12% average of the Entertainment industry. Independently of how Edel SE KGaA compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, Edel SE KGaA's ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 5.8%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Edel SE KGaA's past growth compares to other companies.

XTRA:EDL Past Revenue and Net Income, October 23rd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Edel SE KGaA has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Edel SE KGaA's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Edel SE KGaA has total assets of €161m and current liabilities of €26m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Edel SE KGaA's ROCE

Overall, Edel SE KGaA has a decent ROCE and could be worthy of further research. There might be better investments than Edel SE KGaA 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.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.