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Is Müller - Die lila Logistik AG (ETR:MLL) Struggling With Its 3.6% Return On Capital Employed?

Simply Wall St

Today we are going to look at Müller - Die lila Logistik AG (ETR:MLL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared 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. Overall, it is a valuable metric that has its flaws. 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:

0.036 = €2.1m ÷ (€82m - €23m) (Based on the trailing twelve months to December 2018.)

Therefore, Müller - Die lila Logistik has an ROCE of 3.6%.

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Does Müller - Die lila Logistik Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Müller - Die lila Logistik's ROCE appears to be significantly below the 11% average in the Logistics industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Müller - Die lila Logistik's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Müller - Die lila Logistik's current ROCE of 3.6% is lower than its ROCE in the past, which was 5.5%, 3 years ago. So investors might consider if it has had issues recently.

XTRA:MLL Past Revenue and Net Income, May 26th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Müller - Die lila Logistik has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Müller - Die lila Logistik's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Müller - Die lila Logistik has total assets of €82m and current liabilities of €23m. As a result, its current liabilities are equal to approximately 28% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On Müller - Die lila Logistik's ROCE

That said, Müller - Die lila Logistik's ROCE is mediocre, there may be more attractive investments around. 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).

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.