Today we are going to look at N.V. Nederlandsche Apparatenfabriek Nedap (AMS:NEDAP) 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 up, we'll look at what ROCE is and how we calculate it. 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.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 N.V. Nederlandsche Apparatenfabriek Nedap:
0.24 = €18m ÷ (€117m - €43m) (Based on the trailing twelve months to June 2019.)
So, N.V. Nederlandsche Apparatenfabriek Nedap has an ROCE of 24%.
Does N.V. Nederlandsche Apparatenfabriek Nedap Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that N.V. Nederlandsche Apparatenfabriek Nedap's ROCE is meaningfully better than the 12% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, N.V. Nederlandsche Apparatenfabriek Nedap's ROCE in absolute terms currently looks quite high.
We can see that, N.V. Nederlandsche Apparatenfabriek Nedap currently has an ROCE of 24% compared to its ROCE 3 years ago, which was 17%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how N.V. Nederlandsche Apparatenfabriek Nedap'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 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
N.V. Nederlandsche Apparatenfabriek Nedap'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
N.V. Nederlandsche Apparatenfabriek Nedap has total assets of €117m and current liabilities of €43m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. N.V. Nederlandsche Apparatenfabriek Nedap has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On N.V. Nederlandsche Apparatenfabriek Nedap's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than N.V. Nederlandsche Apparatenfabriek Nedap 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.
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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.