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Why We’re Not Impressed By Royal Boskalis Westminster N.V.’s (AMS:BOKA) 1.4% ROCE

Simply Wall St

Today we are going to look at Royal Boskalis Westminster N.V. (AMS:BOKA) 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. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 Royal Boskalis Westminster:

0.014 = €40m ÷ (€4.6b - €1.6b) (Based on the trailing twelve months to December 2019.)

So, Royal Boskalis Westminster has an ROCE of 1.4%.

View our latest analysis for Royal Boskalis Westminster

Is Royal Boskalis Westminster's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Royal Boskalis Westminster's ROCE is meaningfully below the Construction industry average of 6.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Royal Boskalis Westminster stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

Royal Boskalis Westminster's current ROCE of 1.4% is lower than 3 years ago, when the company reported a 8.1% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Royal Boskalis Westminster's ROCE compares to its industry. Click to see more on past growth.

ENXTAM:BOKA Past Revenue and Net Income May 16th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 Royal Boskalis Westminster.

How Royal Boskalis Westminster's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Royal Boskalis Westminster has total assets of €4.6b and current liabilities of €1.6b. As a result, its current liabilities are equal to approximately 36% of its total assets. Royal Boskalis Westminster has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

Our Take On Royal Boskalis Westminster's ROCE

This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Royal Boskalis Westminster. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.