Today we'll evaluate ORIOR AG (VTX:ORON) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 ORIOR:
0.13 = CHF37m ÷ (CHF404m - CHF115m) (Based on the trailing twelve months to December 2019.)
Therefore, ORIOR has an ROCE of 13%.
Does ORIOR Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that ORIOR's ROCE is meaningfully better than the 11% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from ORIOR's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, ORIOR currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 7.9%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how ORIOR's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for ORIOR.
What Are Current Liabilities, And How Do They Affect ORIOR's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
ORIOR has current liabilities of CHF115m and total assets of CHF404m. As a result, its current liabilities are equal to approximately 28% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On ORIOR's ROCE
With that in mind, ORIOR's ROCE appears pretty good. ORIOR looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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