Today we’ll look at SW Umwelttechnik Stoiser & Wolschner AG (VIE:SWUT) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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.’
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for SW Umwelttechnik Stoiser & Wolschner:
0.089 = €3.4m ÷ (€83m – €21m) (Based on the trailing twelve months to June 2018.)
Therefore, SW Umwelttechnik Stoiser & Wolschner has an ROCE of 8.9%.
Is SW Umwelttechnik Stoiser & Wolschner’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, SW Umwelttechnik Stoiser & Wolschner’s ROCE appears to be around the 11% average of the Construction industry. Independently of how SW Umwelttechnik Stoiser & Wolschner compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If SW Umwelttechnik Stoiser & Wolschner is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do SW Umwelttechnik Stoiser & Wolschner’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
SW Umwelttechnik Stoiser & Wolschner has total assets of €83m and current liabilities of €21m. As a result, its current liabilities are equal to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On SW Umwelttechnik Stoiser & Wolschner’s ROCE
This is good to see, and with a sound ROCE, SW Umwelttechnik Stoiser & Wolschner could be worth a closer look. Of course you might be able to find a better stock than SW Umwelttechnik Stoiser & Wolschner. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 firstname.lastname@example.org.