Today we'll evaluate Müller - Die lila Logistik AG (ETR:MLL) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.
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 Müller - Die lila Logistik:
0.062 = €5.2m ÷ (€119m - €36m) (Based on the trailing twelve months to June 2019.)
Therefore, Müller - Die lila Logistik has an ROCE of 6.2%.
Is Müller - Die lila Logistik's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Müller - Die lila Logistik's ROCE appears meaningfully below the 9.9% average reported by the Logistics industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Müller - Die lila Logistik stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
You can see in the image below how Müller - Die lila Logistik's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is Müller - Die lila Logistik? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Müller - Die lila Logistik'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Müller - Die lila Logistik has total assets of €119m and current liabilities of €36m. As a result, its current liabilities are equal to approximately 30% of its total assets. Müller - Die lila Logistik's ROCE is improved somewhat by its moderate amount of current liabilities.
What We Can Learn From Müller - Die lila Logistik's ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 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. Thank you for reading.