Are Softronic AB’s (STO:SOF B) Returns Worth Your While?
Today we are going to look at Softronic AB (STO:SOF B) 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Softronic:
0.24 = kr67m ÷ (kr437m - kr155m) (Based on the trailing twelve months to June 2019.)
So, Softronic has an ROCE of 24%.
See our latest analysis for Softronic
Is Softronic's ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Softronic's ROCE is fairly close to the IT industry average of 21%. Putting aside its position relative to its industry for now, in absolute terms, Softronic's ROCE is currently very good.
We can see that, Softronic currently has an ROCE of 24% compared to its ROCE 3 years ago, which was 17%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Softronic's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. If Softronic is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Softronic's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Softronic has total liabilities of kr155m and total assets of kr437m. As a result, its current liabilities are equal to approximately 36% of its total assets. Softronic's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Softronic's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Softronic looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.
