How Do Nebelhornbahn-Aktiengesellschaft’s (MUN:NHB) Returns On Capital Compare To Peers?

Today we are going to look at Nebelhornbahn-Aktiengesellschaft (MUN:NHB) 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.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?

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 Nebelhornbahn-Aktiengesellschaft:

0.041 = €944k ÷ (€28m – €4.6m) (Based on the trailing twelve months to October 2018.)

Therefore, Nebelhornbahn-Aktiengesellschaft has an ROCE of 4.1%.

See our latest analysis for Nebelhornbahn-Aktiengesellschaft

Is Nebelhornbahn-Aktiengesellschaft’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Nebelhornbahn-Aktiengesellschaft’s ROCE is meaningfully below the Hospitality industry average of 7.2%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Nebelhornbahn-Aktiengesellschaft’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.

Nebelhornbahn-Aktiengesellschaft’s current ROCE of 4.1% is lower than its ROCE in the past, which was 6.6%, 3 years ago. So investors might consider if it has had issues recently. Take a look at the image below to see how Nebelhornbahn-Aktiengesellschaft’s past growth compares to the average in its industry.

MUN:NHB Past Revenue and Net Income, October 24th 2019
MUN:NHB Past Revenue and Net Income, October 24th 2019

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. 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 Nebelhornbahn-Aktiengesellschaft’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Nebelhornbahn-Aktiengesellschaft has total liabilities of €4.6m and total assets of €28m. 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

That said, Nebelhornbahn-Aktiengesellschaft’s ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Nebelhornbahn-Aktiengesellschaft better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.