Today we'll evaluate Oyj Ahola Transport Abp (HEL:AHOLA) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Oyj Ahola Transport Abp:
0.076 = €1.1m ÷ (€26m - €12m) (Based on the trailing twelve months to December 2018.)
So, Oyj Ahola Transport Abp has an ROCE of 7.6%.
Is Oyj Ahola Transport Abp's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Oyj Ahola Transport Abp's ROCE appears to be around the 9.5% average of the Transportation industry. Setting aside the industry comparison for now, Oyj Ahola Transport Abp's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Oyj Ahola Transport Abp's current ROCE of 7.6% is lower than its ROCE in the past, which was 13%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Oyj Ahola Transport Abp's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. You can check if Oyj Ahola Transport Abp has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Oyj Ahola Transport Abp's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Oyj Ahola Transport Abp has total liabilities of €12m and total assets of €26m. As a result, its current liabilities are equal to approximately 44% of its total assets. Oyj Ahola Transport Abp's ROCE is improved somewhat by its moderate amount of current liabilities.
What We Can Learn From Oyj Ahola Transport Abp's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better investment than Oyj Ahola Transport Abp. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.