Today we'll evaluate Getinge AB (STO:GETI B) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Getinge:
0.046 = kr2.0b ÷ (kr47b - kr1.8b) (Based on the trailing twelve months to September 2019.)
Therefore, Getinge has an ROCE of 4.6%.
Does Getinge Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Getinge's ROCE appears to be significantly below the 6.8% average in the Medical Equipment industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Getinge's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Getinge's current ROCE of 4.6% is lower than its ROCE in the past, which was 7.2%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Getinge's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Getinge's Current Liabilities And Their Impact On 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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Getinge has total assets of kr47b and current liabilities of kr1.8b. Therefore its current liabilities are equivalent to approximately 3.9% of its total assets. With low levels of current liabilities, at least Getinge's mediocre ROCE is not unduly boosted.
What We Can Learn From Getinge's ROCE
If performance improves, then Getinge may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Getinge. 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).
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.
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