Today we'll evaluate Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE:SBO) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
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. Overall, it is a valuable metric that has its flaws. 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'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Schoeller-Bleckmann Oilfield Equipment:
0.11 = €71m ÷ (€912m - €274m) (Based on the trailing twelve months to September 2019.)
Therefore, Schoeller-Bleckmann Oilfield Equipment has an ROCE of 11%.
Does Schoeller-Bleckmann Oilfield Equipment Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Schoeller-Bleckmann Oilfield Equipment's ROCE is meaningfully higher than the 7.4% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Schoeller-Bleckmann Oilfield Equipment sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Schoeller-Bleckmann Oilfield Equipment delivered an ROCE of 11%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how Schoeller-Bleckmann Oilfield Equipment'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. We note Schoeller-Bleckmann Oilfield Equipment could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Schoeller-Bleckmann Oilfield Equipment's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Schoeller-Bleckmann Oilfield Equipment has total liabilities of €274m and total assets of €912m. As a result, its current liabilities are equal to approximately 30% of its total assets. With this level of current liabilities, Schoeller-Bleckmann Oilfield Equipment's ROCE is boosted somewhat.
Our Take On Schoeller-Bleckmann Oilfield Equipment's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Schoeller-Bleckmann Oilfield Equipment 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 Schoeller-Bleckmann Oilfield Equipment 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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