Today we'll look at Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Scheerders van Kerchove's Verenigde fabrieken:
0.045 = €1.1m ÷ (€38m - €13m) (Based on the trailing twelve months to December 2018.)
So, Scheerders van Kerchove's Verenigde fabrieken has an ROCE of 4.5%.
Is Scheerders van Kerchove's Verenigde fabrieken's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Scheerders van Kerchove's Verenigde fabrieken's ROCE appears meaningfully below the 8.6% average reported by the Basic Materials industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Scheerders van Kerchove's Verenigde fabrieken stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
You can see in the image below how Scheerders van Kerchove's Verenigde fabrieken'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, after all, simply a snap shot of a single year. How cyclical is Scheerders van Kerchove's Verenigde fabrieken? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Scheerders van Kerchove's Verenigde fabrieken's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Scheerders van Kerchove's Verenigde fabrieken has total assets of €38m and current liabilities of €13m. As a result, its current liabilities are equal to approximately 33% of its total assets. Scheerders van Kerchove's Verenigde fabrieken has a medium level of current liabilities, which would boost its ROCE somewhat.
Our Take On Scheerders van Kerchove's Verenigde fabrieken's ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might also be able to find a better stock than Scheerders van Kerchove's Verenigde fabrieken. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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