Today we are going to look at Münchener Tierpark Hellabrunn AG (MUN:MTP) to see whether it might be an attractive investment prospect. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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’.
So, How Do We Calculate ROCE?
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 Münchener Tierpark Hellabrunn:
0.011 = €667k ÷ (€67m – €4.4m) (Based on the trailing twelve months to December 2017.)
Therefore, Münchener Tierpark Hellabrunn has an ROCE of 1.1%.
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Is Münchener Tierpark Hellabrunn’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Münchener Tierpark Hellabrunn’s ROCE is meaningfully below the Hospitality industry average of 5.8%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Münchener Tierpark Hellabrunn compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.2% available in government bonds. It is likely that there are more attractive prospects out there.
Münchener Tierpark Hellabrunn’s current ROCE of 1.1% is lower than 3 years ago, when the company reported a 6.0% ROCE. This makes us wonder if the business is facing new challenges.
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, after all, simply a snap shot of a single year. You can check if Münchener Tierpark Hellabrunn has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Münchener Tierpark Hellabrunn’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Münchener Tierpark Hellabrunn has total assets of €67m and current liabilities of €4.4m. As a result, its current liabilities are equal to approximately 6.6% of its total assets. With barely any current liabilities, there is minimal impact on Münchener Tierpark Hellabrunn’s admittedly low ROCE.
Our Take On Münchener Tierpark Hellabrunn’s ROCE
Still, investors could probably find more attractive prospects with better performance out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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.