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Why We Like COLTENE Holding AG’s (VTX:CLTN) 31% Return On Capital Employed

Simply Wall St

Today we'll evaluate COLTENE Holding AG (VTX:CLTN) to determine whether it could have potential as an investment idea. 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.

Firstly, we'll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 COLTENE Holding:

0.31 = CHF26m ÷ (CHF185m - CHF99m) (Based on the trailing twelve months to June 2019.)

Therefore, COLTENE Holding has an ROCE of 31%.

See our latest analysis for COLTENE Holding

Is COLTENE Holding's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that COLTENE Holding's ROCE is meaningfully better than the 17% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, COLTENE Holding's ROCE is currently very good.

Our data shows that COLTENE Holding currently has an ROCE of 31%, compared to its ROCE of 20% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how COLTENE Holding's past growth compares to other companies.

SWX:CLTN Past Revenue and Net Income, January 1st 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for COLTENE Holding.

What Are Current Liabilities, And How Do They Affect COLTENE Holding's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

COLTENE Holding has total liabilities of CHF99m and total assets of CHF185m. As a result, its current liabilities are equal to approximately 54% of its total assets. While a high level of current liabilities boosts its ROCE, COLTENE Holding's returns are still very good.

Our Take On COLTENE Holding's ROCE

In my book, this business could be worthy of further research. COLTENE Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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

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.