Do You Know About HELLA GmbH & Co. KGaA’s (ETR:HLE) ROCE?
Today we'll evaluate HELLA GmbH & Co. KGaA (ETR:HLE) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 HELLA GmbH KGaA:
0.10 = €451m ÷ (€6.4b - €2.0b) (Based on the trailing twelve months to August 2019.)
Therefore, HELLA GmbH KGaA has an ROCE of 10%.
Check out our latest analysis for HELLA GmbH KGaA
Is HELLA GmbH KGaA's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see HELLA GmbH KGaA's ROCE is around the 10% average reported by the Auto Components industry. Independently of how HELLA GmbH KGaA compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how HELLA GmbH KGaA's past growth compares to other companies.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for HELLA GmbH KGaA.
What Are Current Liabilities, And How Do They Affect HELLA GmbH KGaA's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
HELLA GmbH KGaA has total assets of €6.4b and current liabilities of €2.0b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. With this level of current liabilities, HELLA GmbH KGaA's ROCE is boosted somewhat.
The Bottom Line On HELLA GmbH KGaA's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than HELLA GmbH 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.
I will like HELLA GmbH KGaA better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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