What Can We Make Of Uniper SE’s (ETR:UN01) High Return On Capital?
Today we are going to look at Uniper SE (ETR:UN01) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Uniper:
0.09 = €2.2b ÷ (€41b - €16b) (Based on the trailing twelve months to September 2019.)
So, Uniper has an ROCE of 9.0%.
See our latest analysis for Uniper
Does Uniper Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Uniper's ROCE is meaningfully higher than the 4.1% average in the Renewable Energy industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Uniper sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Uniper reported an ROCE of 9.0% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. You can see in the image below how Uniper's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Uniper.
Uniper'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Uniper has total assets of €41b and current liabilities of €16b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Uniper has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Uniper's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than Uniper out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Uniper better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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