Why Hamburger Hafen und Logistik Aktiengesellschaft’s (FRA:HHFA) Use Of Investor Capital Doesn’t Look Great
Today we are going to look at Hamburger Hafen und Logistik Aktiengesellschaft (FRA:HHFA) to see whether it might be an attractive investment prospect. 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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. All else being equal, a better business will have a higher ROCE. 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.’
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 Hamburger Hafen und Logistik:
0.10 = €170m ÷ (€1.9b – €227m) (Based on the trailing twelve months to September 2018.)
So, Hamburger Hafen und Logistik has an ROCE of 10%.
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Does Hamburger Hafen und Logistik Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Hamburger Hafen und Logistik’s ROCE is fairly close to the Infrastructure industry average of 9.8%. Separate from Hamburger Hafen und Logistik’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
It is important to remember that ROCE shows past performance, and is 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 Hamburger Hafen und Logistik.
How Hamburger Hafen und Logistik’s Current Liabilities Impact 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Hamburger Hafen und Logistik has total liabilities of €227m and total assets of €1.9b. As a result, its current liabilities are equal to approximately 12% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Hamburger Hafen und Logistik’s ROCE
This is good to see, and with a sound ROCE, Hamburger Hafen und Logistik could be worth a closer look. You might be able to find a better buy than Hamburger Hafen und Logistik. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
