What Can We Learn From Scanfil Oyj’s (HEL:SCANFL) Investment Returns?

Today we are going to look at Scanfil Oyj (HEL:SCANFL) 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.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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'.

How Do You Calculate Return On Capital Employed?

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 Scanfil Oyj:

0.19 = €41m ÷ (€346m - €131m) (Based on the trailing twelve months to March 2020.)

So, Scanfil Oyj has an ROCE of 19%.

View our latest analysis for Scanfil Oyj

Is Scanfil Oyj's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Scanfil Oyj's ROCE is fairly close to the Electronic industry average of 21%. Regardless of the industry comparison, in absolute terms, Scanfil Oyj's ROCE currently appears to be excellent.

We can see that, Scanfil Oyj currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 13%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Scanfil Oyj's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Scanfil Oyj.

What Are Current Liabilities, And How Do They Affect Scanfil Oyj's 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.

Scanfil Oyj has total assets of €346m and current liabilities of €131m. As a result, its current liabilities are equal to approximately 38% of its total assets. Scanfil Oyj's ROCE is boosted somewhat by its middling amount of current liabilities.

Our Take On Scanfil Oyj's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Scanfil Oyj 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.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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.