Today we’ll evaluate Nebelhornbahn-Aktiengesellschaft (MUN:NHB) 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 of all, we’ll work out how to calculate ROCE. 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 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. 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.’
So, How Do We Calculate ROCE?
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 Nebelhornbahn-Aktiengesellschaft:
0.041 = €944k ÷ (€28m – €4.6m) (Based on the trailing twelve months to October 2018.)
So, Nebelhornbahn-Aktiengesellschaft has an ROCE of 4.1%.
Does Nebelhornbahn-Aktiengesellschaft Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Nebelhornbahn-Aktiengesellschaft’s ROCE appears to be significantly below the 7.4% average in the Hospitality industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Nebelhornbahn-Aktiengesellschaft 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.
As we can see, Nebelhornbahn-Aktiengesellschaft currently has an ROCE of 4.1%, less than the 6.6% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Nebelhornbahn-Aktiengesellschaft’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Nebelhornbahn-Aktiengesellschaft has total assets of €28m and current liabilities of €4.6m. As a result, its current liabilities are equal to approximately 17% 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 Nebelhornbahn-Aktiengesellschaft’s ROCE
If Nebelhornbahn-Aktiengesellschaft continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better buy than Nebelhornbahn-Aktiengesellschaft. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.