Today we'll look at Scanfil Oyj (HEL:SCANFL) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.
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 Scanfil Oyj:
0.17 = €29m ÷ (€357m - €179m) (Based on the trailing twelve months to June 2019.)
Therefore, Scanfil Oyj has an ROCE of 17%.
Is Scanfil Oyj's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Scanfil Oyj's ROCE appears meaningfully below the 22% average reported by the Electronic industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of where Scanfil Oyj sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Scanfil Oyj's ROCE appears to be 17%, compared to 3 years ago, when its ROCE was 4.9%. This makes us wonder if the company is improving. You can see in the image below how Scanfil Oyj's ROCE compares to its industry. Click to see more on 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 Scanfil Oyj.
How Scanfil Oyj's Current Liabilities Impact 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 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.
Scanfil Oyj has total liabilities of €179m and total assets of €357m. As a result, its current liabilities are equal to approximately 50% of its total assets. Scanfil Oyj has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On Scanfil Oyj's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. Scanfil Oyj shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Scanfil Oyj better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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.