Today we'll look at Koninklijke BAM Groep nv (AMS:BAMNB) and reflect on its potential as an investment. 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. 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Koninklijke BAM Groep:
0.077 = €101m ÷ (€4.6b - €3.3b) (Based on the trailing twelve months to December 2018.)
Therefore, Koninklijke BAM Groep has an ROCE of 7.7%.
Is Koninklijke BAM Groep's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Koninklijke BAM Groep's ROCE is fairly close to the Construction industry average of 8.8%. Separate from how Koninklijke BAM Groep stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Our data shows that Koninklijke BAM Groep currently has an ROCE of 7.7%, compared to its ROCE of 1.1% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Koninklijke BAM Groep'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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Koninklijke BAM Groep'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. 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.
Koninklijke BAM Groep has total assets of €4.6b and current liabilities of €3.3b. Therefore its current liabilities are equivalent to approximately 71% of its total assets. Koninklijke BAM Groep's current liabilities are fairly high, making its ROCE look better than otherwise.
Our Take On Koninklijke BAM Groep's ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. Of course, you might also be able to find a better stock than Koninklijke BAM Groep. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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.