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Why SinterCast AB (publ)’s (STO:SINT) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll look at SinterCast AB (publ) (STO:SINT) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 SinterCast:

0.37 = kr44m ÷ (kr132m - kr12m) (Based on the trailing twelve months to September 2019.)

So, SinterCast has an ROCE of 37%.

See our latest analysis for SinterCast

Does SinterCast Have A Good ROCE?

One way to assess ROCE is to compare similar companies. SinterCast's ROCE appears to be substantially greater than the 15% average in the Machinery industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, SinterCast's ROCE is currently very good.

In our analysis, SinterCast's ROCE appears to be 37%, compared to 3 years ago, when its ROCE was 29%. This makes us think the business might be improving. The image below shows how SinterCast's ROCE compares to its industry, and you can click it to see more detail on its past growth.

OM:SINT Past Revenue and Net Income, February 18th 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for SinterCast.

SinterCast's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.

SinterCast has total assets of kr132m and current liabilities of kr12m. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. SinterCast has low current liabilities, which have a negligible impact on its relatively good ROCE.

What We Can Learn From SinterCast's ROCE

This suggests the company would be worth researching in more depth. SinterCast looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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