Today we'll evaluate Allgäuer Brauhaus AG (MUN:ALB) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Allgäuer Brauhaus:
0.15 = €1.2m ÷ (€15m - €7.2m) (Based on the trailing twelve months to December 2018.)
Therefore, Allgäuer Brauhaus has an ROCE of 15%.
Is Allgäuer Brauhaus's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Allgäuer Brauhaus's ROCE is meaningfully higher than the 7.5% average in the Beverage industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Allgäuer Brauhaus sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Allgäuer Brauhaus reported an ROCE of 15% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. The image below shows how Allgäuer Brauhaus's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is, after all, simply a snap shot of a single year. If Allgäuer Brauhaus is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Allgäuer Brauhaus'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. 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.
Allgäuer Brauhaus has current liabilities of €7.2m and total assets of €15m. Therefore its current liabilities are equivalent to approximately 47% of its total assets. Allgäuer Brauhaus has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Allgäuer Brauhaus's ROCE
Allgäuer Brauhaus's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Allgäuer Brauhaus 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.
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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