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Today we are going to look at Schweitzer-Mauduit International, Inc. (NYSE:SWM) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 Schweitzer-Mauduit International:
0.098 = US$132m ÷ (US$1.5b - US$140m) (Based on the trailing twelve months to March 2019.)
Therefore, Schweitzer-Mauduit International has an ROCE of 9.8%.
Does Schweitzer-Mauduit International Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Schweitzer-Mauduit International's ROCE is around the 11% average reported by the Forestry industry. Separate from how Schweitzer-Mauduit International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how Schweitzer-Mauduit International's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Schweitzer-Mauduit International.
Schweitzer-Mauduit International's Current Liabilities And Their Impact On Its 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.
Schweitzer-Mauduit International has total assets of US$1.5b and current liabilities of US$140m. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. Schweitzer-Mauduit International reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
What We Can Learn From Schweitzer-Mauduit International's ROCE
Based on this information, Schweitzer-Mauduit International appears to be a mediocre business. Of course, you might also be able to find a better stock than Schweitzer-Mauduit International. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Schweitzer-Mauduit International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.