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Today we are going to look at Österreichische Staatsdruckerei Holding AG (VIE:OESD) 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Österreichische Staatsdruckerei Holding:
0.15 = €5.4m ÷ (€57m – €21m) (Based on the trailing twelve months to September 2018.)
Therefore, Österreichische Staatsdruckerei Holding has an ROCE of 15%.
Is Österreichische Staatsdruckerei Holding’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Österreichische Staatsdruckerei Holding’s ROCE is around the 13% average reported by the Electronic industry. Independently of how Österreichische Staatsdruckerei Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
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 only a point-in-time measure. You can check if Österreichische Staatsdruckerei Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Österreichische Staatsdruckerei Holding’s Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Österreichische Staatsdruckerei Holding has total liabilities of €21m and total assets of €57m. As a result, its current liabilities are equal to approximately 37% of its total assets. Österreichische Staatsdruckerei Holding has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From Österreichische Staatsdruckerei Holding’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. Österreichische Staatsdruckerei Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.