Today we'll look at Koninklijke Ahold Delhaize N.V. (AMS:AD) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Koninklijke Ahold Delhaize:
0.087 = €2.5b ÷ (€41b - €12b) (Based on the trailing twelve months to September 2019.)
Therefore, Koninklijke Ahold Delhaize has an ROCE of 8.7%.
Does Koninklijke Ahold Delhaize Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Koninklijke Ahold Delhaize's ROCE is fairly close to the Consumer Retailing industry average of 8.8%. Independently of how Koninklijke Ahold Delhaize compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Koninklijke Ahold Delhaize's ROCE appears to be 8.7%, compared to 3 years ago, when its ROCE was 6.4%. This makes us wonder if the company is improving. The image below shows how Koninklijke Ahold Delhaize'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. 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, 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 Koninklijke Ahold Delhaize.
How Koninklijke Ahold Delhaize's Current Liabilities Impact 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Koninklijke Ahold Delhaize has total liabilities of €12b and total assets of €41b. As a result, its current liabilities are equal to approximately 30% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Koninklijke Ahold Delhaize's ROCE
With that in mind, Koninklijke Ahold Delhaize's ROCE appears pretty good. There might be better investments than Koninklijke Ahold Delhaize 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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