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How Do Sensec Holding AB (publ)’s (STO:SECS) Returns Compare To Its Industry?

Simply Wall St

Today we'll evaluate Sensec Holding AB (publ) (STO:SECS) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.

How Do You Calculate Return On Capital Employed?

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 Sensec Holding:

0.073 = kr3.2m ÷ (kr63m - kr19m) (Based on the trailing twelve months to September 2019.)

So, Sensec Holding has an ROCE of 7.3%.

View our latest analysis for Sensec Holding

Does Sensec Holding Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Sensec Holding's ROCE is meaningfully below the Electronic industry average of 19%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Sensec Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Sensec Holding's current ROCE of 7.3% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Sensec Holding's ROCE compares to its industry. Click to see more on past growth.

OM:SECS Past Revenue and Net Income, January 22nd 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Sensec Holding's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Sensec Holding has total liabilities of kr19m and total assets of kr63m. As a result, its current liabilities are equal to approximately 31% of its total assets. Sensec Holding has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From Sensec Holding'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 Sensec Holding. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.