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# Siltronic AG (FRA:WAF) Is Employing Capital Very Effectively

Today we are going to look at Siltronic AG (FRA:WAF) to see whether it might be an attractive investment prospect. In particular, weâ€™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.

First, weâ€™ll go over how we calculate ROCE. Second, weâ€™ll look at its ROCE compared to similar companies. Then weâ€™ll determine how its current liabilities are affecting its ROCE.

### Understanding Return On Capital Employed (ROCE)

ROCE measures the â€˜returnâ€™ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 â€˜one dollar invested in the company generates value of more than one dollarâ€™.

### 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) Ã· (Total Assets â€“ Current Liabilities)

Or for Siltronic:

0.30 = â‚¬232m Ã· (â‚¬1.7b â€“ â‚¬256m) (Based on the trailing twelve months to September 2018.)

Therefore, Siltronic has an ROCE of 30%.

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### Does Siltronic Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Siltronicâ€™s ROCE appears to be substantially greater than the 8.6% average in the Semiconductor industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Siltronicâ€™s ROCE currently appears to be excellent.

In our analysis, Siltronicâ€™s ROCE appears to be 30%, compared to 3 years ago, when its ROCE was 5.9%. This makes us wonder if the company is improving.

Remember that this metric is backwards looking â€“ 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Siltronic.

### What Are Current Liabilities, And How Do They Affect Siltronicâ€™s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Siltronic has total liabilities of â‚¬256m and total assets of â‚¬1.7b. As a result, its current liabilities are equal to approximately 15% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

### Our Take On Siltronicâ€™s ROCE

This is good to see, and with such a high ROCE, Siltronic may be worth a closer look. Of course you might be able to find a better stock than Siltronic. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.