Today we’ll evaluate Stalexport Autostrady S.A. (WSE:STX) to determine whether it could have potential as an investment idea. 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Stalexport Autostrady:
0.16 = zł178m ÷ (zł1.3b – zł201m) (Based on the trailing twelve months to June 2019.)
So, Stalexport Autostrady has an ROCE of 16%.
Does Stalexport Autostrady Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Stalexport Autostrady’s ROCE is meaningfully better than the 10% average in the Infrastructure industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Stalexport Autostrady’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
When considering this metric, keep in mind that it is backwards looking, and 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 Stalexport Autostrady.
Do Stalexport Autostrady’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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Stalexport Autostrady has total assets of zł1.3b and current liabilities of zł201m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Stalexport Autostrady’s ROCE
This is good to see, and with a sound ROCE, Stalexport Autostrady could be worth a closer look. Stalexport Autostrady shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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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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. Thank you for reading.