Today we'll look at Malmbergs Elektriska AB (publ) (STO:MEAB B) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Malmbergs Elektriska:
0.12 = kr46m ÷ (kr497m - kr113m) (Based on the trailing twelve months to March 2019.)
So, Malmbergs Elektriska has an ROCE of 12%.
Is Malmbergs Elektriska's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Malmbergs Elektriska's ROCE is around the 12% average reported by the Trade Distributors industry. Separate from Malmbergs Elektriska's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Malmbergs Elektriska's current ROCE of 12% is lower than its ROCE in the past, which was 25%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Malmbergs Elektriska'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Malmbergs Elektriska is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Malmbergs Elektriska's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Malmbergs Elektriska has total assets of kr497m and current liabilities of kr113m. As a result, its current liabilities are equal to approximately 23% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Malmbergs Elektriska's ROCE
With that in mind, Malmbergs Elektriska's ROCE appears pretty good. Malmbergs Elektriska shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Malmbergs Elektriska better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.