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Materialise NV’s (NASDAQ:MTLS) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we are going to look at Materialise NV (NASDAQ:MTLS) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.

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 Materialise:

0.018 = €5.0m ÷ (€347m - €78m) (Based on the trailing twelve months to September 2019.)

So, Materialise has an ROCE of 1.8%.

Check out our latest analysis for Materialise

Is Materialise's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Materialise's ROCE is meaningfully below the Software industry average of 9.8%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Materialise's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Materialise delivered an ROCE of 1.8%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how Materialise's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:MTLS Past Revenue and Net Income, January 28th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Materialise.

Materialise's Current Liabilities And Their Impact On 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Materialise has total assets of €347m and current liabilities of €78m. As a result, its current liabilities are equal to approximately 23% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On Materialise's ROCE

That's not a bad thing, however Materialise has a weak ROCE and may not be an attractive investment. 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.

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.

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. Thank you for reading.