Don’t Buy ICA Gruppen AB (publ) (STO:ICA) Until You Understand Its ROCE

Today we’ll evaluate ICA Gruppen AB (publ) (STO:ICA) to determine whether it could have potential as an investment idea. 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.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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’.

So, How Do We Calculate ROCE?

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 ICA Gruppen:

0.093 = kr5.5b ÷ (kr103b – kr44b) (Based on the trailing twelve months to March 2020.)

So, ICA Gruppen has an ROCE of 9.3%.

See our latest analysis for ICA Gruppen

Is ICA Gruppen’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see ICA Gruppen’s ROCE is around the 9.2% average reported by the Consumer Retailing industry. Regardless of where ICA Gruppen sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how ICA Gruppen’s ROCE compares to its industry. Click to see more on past growth.

OM:ICA Past Revenue and Net Income May 29th 2020
OM:ICA Past Revenue and Net Income May 29th 2020

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ICA Gruppen.

Do ICA Gruppen’s Current Liabilities Skew 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.

ICA Gruppen has total assets of kr103b and current liabilities of kr44b. Therefore its current liabilities are equivalent to approximately 42% of its total assets. With this level of current liabilities, ICA Gruppen’s ROCE is boosted somewhat.

Our Take On ICA Gruppen’s ROCE

ICA Gruppen’s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than ICA Gruppen out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.