Today we'll evaluate Logwin AG (ETR:TGHN) 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 Logwin:
0.18 = €51m ÷ (€520m - €230m) (Based on the trailing twelve months to June 2019.)
So, Logwin has an ROCE of 18%.
Does Logwin Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Logwin's ROCE is meaningfully higher than the 10% average in the Logistics industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Logwin's ROCE in absolute terms currently looks quite high.
The image below shows how Logwin's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Logwin.
What Are Current Liabilities, And How Do They Affect Logwin'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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Logwin has total liabilities of €230m and total assets of €520m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. A medium level of current liabilities boosts Logwin's ROCE somewhat.
Our Take On Logwin's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Logwin shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Logwin better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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