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Why We’re Not Impressed By BayWa Aktiengesellschaft’s (ETR:BYW) 1.0% ROCE

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Simply Wall St
·4 min read
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Today we are going to look at BayWa Aktiengesellschaft (ETR:BYW) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for BayWa:

0.01 = €44m ÷ (€9.2b - €4.8b) (Based on the trailing twelve months to March 2020.)

So, BayWa has an ROCE of 1.0%.

Check out our latest analysis for BayWa

Is BayWa's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, BayWa's ROCE appears to be significantly below the 11% average in the Trade Distributors industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside BayWa's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

We can see that, BayWa currently has an ROCE of 1.0%, less than the 3.5% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how BayWa's past growth compares to other companies.

XTRA:BYW Past Revenue and Net Income May 14th 2020
XTRA:BYW Past Revenue and Net Income May 14th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 BayWa.

Do BayWa's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

BayWa has total assets of €9.2b and current liabilities of €4.8b. Therefore its current liabilities are equivalent to approximately 52% of its total assets. BayWa has a fairly high level of current liabilities, boosting its ROCE.

Our Take On BayWa's ROCE

BayWa's ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. Of course, you might also be able to find a better stock than BayWa. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.