Today we are going to look at Siemens Gamesa Renewable Energy, S.A. (BME:SGRE) 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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. 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 Siemens Gamesa Renewable Energy:
0.036 = €347m ÷ (€17b - €7.2b) (Based on the trailing twelve months to December 2018.)
So, Siemens Gamesa Renewable Energy has an ROCE of 3.6%.
Does Siemens Gamesa Renewable Energy Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Siemens Gamesa Renewable Energy's ROCE is meaningfully below the Electrical industry average of 12%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Siemens Gamesa Renewable Energy stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Siemens Gamesa Renewable Energy's current ROCE of 3.6% is lower than 3 years ago, when the company reported a 32% ROCE. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Siemens Gamesa Renewable Energy's Current Liabilities Skew 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.
Siemens Gamesa Renewable Energy has total assets of €17b and current liabilities of €7.2b. As a result, its current liabilities are equal to approximately 43% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Siemens Gamesa Renewable Energy's low ROCE is unappealing.
Our Take On Siemens Gamesa Renewable Energy's ROCE
There are likely better investments out there. You might be able to find a better investment than Siemens Gamesa Renewable Energy. 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).
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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.