Today we are going to look at Surgical Science Sweden AB (publ) (STO:SUS) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
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?
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 Surgical Science Sweden:
0.018 = kr7.3m ÷ (kr454m - kr44m) (Based on the trailing twelve months to September 2019.)
Therefore, Surgical Science Sweden has an ROCE of 1.8%.
Does Surgical Science Sweden Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Surgical Science Sweden's ROCE appears to be significantly below the 6.6% average in the Medical Equipment industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Surgical Science Sweden's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
We can see that, Surgical Science Sweden currently has an ROCE of 1.8% compared to its ROCE 3 years ago, which was 0.7%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Surgical Science Sweden'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. 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.
Do Surgical Science Sweden's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Surgical Science Sweden has total liabilities of kr44m and total assets of kr454m. As a result, its current liabilities are equal to approximately 9.7% of its total assets. Surgical Science Sweden has a low level of current liabilities, which have a negligible impact on its already low ROCE.
The Bottom Line On Surgical Science Sweden's ROCE
Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better investment than Surgical Science Sweden. 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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