This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in edding AG (FRA:EDD3).
If you purchase a EDD3 share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand edding’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Check out our latest analysis for edding
ROCE: Explanation and Calculation
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if edding is good at growing investor capital. EDD3’s ROCE is calculated below:
ROCE Calculation for EDD3
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €11.5m ÷ (€104.8m – €28.8m) = 15.2%
As you can see, EDD3 earned €15.2 from every €100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows edding is currently able to return a robust amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.
Can any of this change?
The encouraging ROCE is good news for edding investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, EDD3’s ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that edding will continue the solid returns. If you go back three years, you’ll find that EDD3’s ROCE has decreased from 18.9%. With this, the current earnings of €11.5m actually declined from €12.2m whilst capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
Next Steps
Although edding’s ROCE has decreased over the past few years, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for EDD3’s future growth? Take a look at our free research report of analyst consensus for EDD3’s outlook.
- Valuation: What is EDD3 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EDD3 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.