Today we are going to look at Pozbud T&R Spolka Akcyjna (WSE:POZ) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. 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?
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 Pozbud T&R Spolka Akcyjna:
0.055 = zł13m ÷ (zł377m - zł143m) (Based on the trailing twelve months to December 2018.)
Therefore, Pozbud T&R Spolka Akcyjna has an ROCE of 5.5%.
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Does Pozbud T&R Spolka Akcyjna Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Pozbud T&R Spolka Akcyjna's ROCE appears meaningfully below the 9.4% average reported by the Building industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Pozbud T&R Spolka Akcyjna's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pozbud T&R Spolka Akcyjna.
What Are Current Liabilities, And How Do They Affect Pozbud T&R Spolka Akcyjna's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Pozbud T&R Spolka Akcyjna has total liabilities of zł143m and total assets of zł377m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Pozbud T&R Spolka Akcyjna has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
Our Take On Pozbud T&R Spolka Akcyjna's ROCE
This company may not be the most attractive investment prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 firstname.lastname@example.org. 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.