# What We Think Of SAF-Holland S.A.’s (FRA:SFQ) Investment Potential

Today we’ll evaluate SAF-Holland S.A. (FRA:SFQ) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?

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 SAF-Holland:

0.098 = €82m ÷ (€1.1b – €223m) (Based on the trailing twelve months to March 2019.)

So, SAF-Holland has an ROCE of 9.8%.

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### Does SAF-Holland Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that SAF-Holland’s ROCE is fairly close to the Auto Components industry average of 8.7%. Regardless of where SAF-Holland sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

### SAF-Holland’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

SAF-Holland has total assets of €1.1b and current liabilities of €223m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.

### Our Take On SAF-Holland’s ROCE

This is good to see, and with a sound ROCE, SAF-Holland could be worth a closer look. SAF-Holland 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 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.