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How Do Viking Line ABP’s (HEL:VIK1V) Returns Compare To Its Industry?

Simply Wall St

Today we'll look at Viking Line ABP (HEL:VIK1V) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Viking Line ABP:

0.05 = €19m ÷ (€486m - €102m) (Based on the trailing twelve months to September 2019.)

Therefore, Viking Line ABP has an ROCE of 5.0%.

Check out our latest analysis for Viking Line ABP

Is Viking Line ABP's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Viking Line ABP's ROCE is meaningfully below the Hospitality industry average of 7.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Viking Line ABP's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how Viking Line ABP's past growth compares to other companies.

HLSE:VIK1V Past Revenue and Net Income, December 4th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Viking Line ABP has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Viking Line ABP'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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Viking Line ABP has total assets of €486m and current liabilities of €102m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On Viking Line ABP's ROCE

That said, Viking Line ABP's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Viking Line ABP. 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 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.

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. Thank you for reading.