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Here’s why BillerudKorsnäs AB (publ)’s (STO:BILL) Returns On Capital Matters So Much

Simply Wall St

Today we'll evaluate BillerudKorsnäs AB (publ) (STO:BILL) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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'.

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 BillerudKorsnäs:

0.044 = kr1.4b ÷ (kr39b - kr6.5b) (Based on the trailing twelve months to September 2019.)

So, BillerudKorsnäs has an ROCE of 4.4%.

View our latest analysis for BillerudKorsnäs

Does BillerudKorsnäs Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, BillerudKorsnäs's ROCE appears meaningfully below the 11% average reported by the Packaging industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, BillerudKorsnäs'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.

We can see that, BillerudKorsnäs currently has an ROCE of 4.4%, less than the 11% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how BillerudKorsnäs's past growth compares to other companies.

OM:BILL Past Revenue and Net Income, January 12th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 BillerudKorsnäs.

BillerudKorsnäs's Current Liabilities And Their Impact On 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

BillerudKorsnäs has total assets of kr39b and current liabilities of kr6.5b. As a result, its current liabilities are equal to approximately 17% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From BillerudKorsnäs's ROCE

That said, BillerudKorsnäs's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like BillerudKorsnäs 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.

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.