Today we are going to look at Brembo S.p.A. (BIT:BRE) 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Brembo:
0.18 = €318m ÷ (€2.7b – €958m) (Based on the trailing twelve months to June 2019.)
Therefore, Brembo has an ROCE of 18%.
Does Brembo Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Brembo’s ROCE is meaningfully higher than the 8.8% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Brembo sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Brembo’s current ROCE of 18% is lower than its ROCE in the past, which was 28%, 3 years ago. This makes us wonder if the business is facing new challenges.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Brembo’s Current Liabilities Impact 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Brembo has total liabilities of €958m and total assets of €2.7b. As a result, its current liabilities are equal to approximately 35% of its total assets. With this level of current liabilities, Brembo’s ROCE is boosted somewhat.
The Bottom Line On Brembo’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Brembo 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.