Today we'll evaluate Consti Oyj (HEL:CONSTI) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Overall, it is a valuable metric that has its flaws. 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 Consti Oyj:
0.095 = €4.6m ÷ (€122m - €73m) (Based on the trailing twelve months to March 2020.)
So, Consti Oyj has an ROCE of 9.5%.
Is Consti Oyj's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Consti Oyj's ROCE appears to be around the 9.8% average of the Construction industry. Separate from Consti Oyj's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Consti Oyj's current ROCE of 9.5% is lower than its ROCE in the past, which was 21%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Consti Oyj's ROCE compares to its industry. Click to see more on 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Consti Oyj.
Do Consti Oyj's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Consti Oyj has current liabilities of €73m and total assets of €122m. Therefore its current liabilities are equivalent to approximately 60% of its total assets. Consti Oyj's current liabilities are fairly high, which increases its ROCE significantly.
The Bottom Line On Consti Oyj's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. There might be better investments than Consti Oyj 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 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 firstname.lastname@example.org. 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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