Hutter & Schrantz Stahlbau AG (VIE:HST): Why Return On Capital Employed Is Important

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Hutter & Schrantz Stahlbau AG (VIE:HST).

Buying Hutter & Schrantz Stahlbau makes you a partial owner of the company. 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. Your return is tied to HST’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Hutter & Schrantz Stahlbau, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

View our latest analysis for Hutter & Schrantz Stahlbau

Hutter & Schrantz Stahlbau’s Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Hutter & Schrantz Stahlbau’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. HST’s ROCE is calculated below:

ROCE Calculation for HST

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = €1.97m ÷ (€78.38m – €16.28m) = 3.17%

As you can see, HST earned €3.2 from every €100 you invested over the previous twelve months. This shows Hutter & Schrantz Stahlbau provides an unsatisfying capital return that is well below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if HST is clever with their reinvestments or dividend payments, investors can still grow their capital although to a poor extent.

WBAG:HST Last Perf July 23rd 18
WBAG:HST Last Perf July 23rd 18

A deeper look

Although Hutter & Schrantz Stahlbau is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you’ll find that HST’s ROCE has decreased from 21.01%. With this, the current earnings of €1.97m actually declined from €11.02m whilst capital employed has increased due to an increase in total assets and a smaller reliance on current liabilities (less borrowing to fund operations) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

HST’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like the management team. 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.

  1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Hutter & Schrantz Stahlbau’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. 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 pass 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.