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Why Bertrandt Aktiengesellschaft’s (ETR:BDT) Use Of Investor Capital Doesn’t Look Great

Today we are going to look at Bertrandt Aktiengesellschaft (ETR:BDT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. Last but not least, we'll look at what impact its current liabilities have on 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. 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'.

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 Bertrandt:

0.10 = €66m ÷ (€804m - €159m) (Based on the trailing twelve months to June 2019.)

Therefore, Bertrandt has an ROCE of 10%.

View our latest analysis for Bertrandt

Does Bertrandt Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Bertrandt's ROCE appears meaningfully below the 14% average reported by the Professional Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of where Bertrandt sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Bertrandt currently has an ROCE of 10%, less than the 15% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Bertrandt's ROCE compares to its industry, and you can click it to see more detail on its past growth.

XTRA:BDT Past Revenue and Net Income, November 3rd 2019
XTRA:BDT Past Revenue and Net Income, November 3rd 2019

It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bertrandt.

Do Bertrandt's Current Liabilities Skew 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 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.

Bertrandt has total assets of €804m and current liabilities of €159m. As a result, its current liabilities are equal to approximately 20% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Bertrandt's ROCE

With that in mind, Bertrandt's ROCE appears pretty good. There might be better investments than Bertrandt 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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