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Today we’ll look at Koninklijke BAM Groep nv (AMS:BAMNB) 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.
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.
What is Return On Capital Employed (ROCE)?
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. Ultimately, it is a useful but imperfect metric. 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?
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 BAM Groep:
0.02 = €25m ÷ (€4.4b – €3.1b) (Based on the trailing twelve months to June 2018.)
Therefore, Koninklijke BAM Groep has an ROCE of 2.0%.
Does Koninklijke BAM Groep Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Koninklijke BAM Groep’s ROCE is meaningfully below the Construction industry average of 9.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Koninklijke BAM Groep stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Koninklijke BAM Groep has an ROCE of 2.0%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Koninklijke BAM Groep.
What Are Current Liabilities, And How Do They Affect Koninklijke BAM Groep’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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Koninklijke BAM Groep has total assets of €4.4b and current liabilities of €3.1b. As a result, its current liabilities are equal to approximately 70% of its total assets. This is a fairly high level of current liabilities, boosting Koninklijke BAM Groep’s ROCE.
Our Take On Koninklijke BAM Groep’s ROCE
Koninklijke BAM Groep’s ROCE in absolute terms is poor, and there are likely better investment prospects out there. Of course you might 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.