What Can We Learn From Micro Systemation AB (publ)’s (STO:MSAB B) Investment Returns?
Today we are going to look at Micro Systemation AB (publ) (STO:MSAB B) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Micro Systemation:
0.12 = kr11m ÷ (kr190m - kr93m) (Based on the trailing twelve months to September 2019.)
So, Micro Systemation has an ROCE of 12%.
See our latest analysis for Micro Systemation
Does Micro Systemation Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Micro Systemation's ROCE is around the 13% average reported by the Software industry. Separate from Micro Systemation's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Micro Systemation's current ROCE of 12% is lower than its ROCE in the past, which was 64%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Micro Systemation's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Micro Systemation.
What Are Current Liabilities, And How Do They Affect Micro Systemation's 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Micro Systemation has total assets of kr190m and current liabilities of kr93m. Therefore its current liabilities are equivalent to approximately 49% of its total assets. Micro Systemation has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Micro Systemation's ROCE
Micro Systemation's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Micro Systemation 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.
Micro Systemation is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
