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Why We’re Not Impressed By Ströer SE & Co. KGaA’s (ETR:SAX) 7.4% ROCE

Simply Wall St

Today we are going to look at Ströer SE & Co. KGaA (ETR:SAX) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. 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'.

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 Ströer SE KGaA:

0.074 = €173m ÷ (€3.0b - €651m) (Based on the trailing twelve months to March 2019.)

Therefore, Ströer SE KGaA has an ROCE of 7.4%.

See our latest analysis for Ströer SE KGaA

Is Ströer SE KGaA's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Ströer SE KGaA's ROCE appears to be significantly below the 11% average in the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Ströer SE KGaA's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

You can click on the image below to see (in greater detail) how Ströer SE KGaA's past growth compares to other companies.

XTRA:SAX Past Revenue and Net Income, August 10th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Ströer SE KGaA's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Ströer SE KGaA has total liabilities of €651m and total assets of €3.0b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Ströer SE KGaA's ROCE

That said, Ströer SE KGaA's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Ströer SE KGaA. 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).

I will like Ströer SE KGaA better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.