U.S. markets closed

# Should You Like QSC AG’s (ETR:QSC) High Return On Capital Employed?

Today we'll evaluate QSC AG (ETR:QSC) 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, 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 '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 QSC:

0.53 = €112m ÷ (€250m - €40m) (Based on the trailing twelve months to September 2019.)

So, QSC has an ROCE of 53%.

View our latest analysis for QSC

### Does QSC Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, QSC's ROCE is meaningfully higher than the 8.9% average in the Telecom 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. Regardless of the industry comparison, in absolute terms, QSC's ROCE currently appears to be excellent.

QSC has an ROCE of 53%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how QSC's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 QSC.

### What Are Current Liabilities, And How Do They Affect QSC's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

QSC has total assets of €250m and current liabilities of €40m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

### Our Take On QSC's ROCE

, There might be better investments than QSC 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.

I will like QSC better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.