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# Here’s why Staatl. Mineralbrunnen AG’s (MUN:SLB) Returns On Capital Matters So Much

Today we are going to look at Staatl. Mineralbrunnen AG (MUN:SLB) 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.

Firstly, 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.

### Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Staatl. Mineralbrunnen:

0.052 = €909k ÷ (€21m – €3.3m) (Based on the trailing twelve months to December 2017.)

Therefore, Staatl. Mineralbrunnen has an ROCE of 5.2%.

### Is Staatl. Mineralbrunnen’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Staatl. Mineralbrunnen’s ROCE appears meaningfully below the 7.8% average reported by the Beverage industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Staatl. Mineralbrunnen stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Staatl. Mineralbrunnen has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

### What Are Current Liabilities, And How Do They Affect Staatl. Mineralbrunnen’s 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.

Staatl. Mineralbrunnen has total assets of €21m and current liabilities of €3.3m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

### The Bottom Line On Staatl. Mineralbrunnen’s ROCE

That said, Staatl. Mineralbrunnen’s ROCE is mediocre, there may be more attractive investments around. Of course you might be able to find a better stock than Staatl. Mineralbrunnen. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.