Today we’ll evaluate CropEnergies AG (ETR:CE2) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 CropEnergies:
0.084 = €43m ÷ (€612m – €105m) (Based on the trailing twelve months to May 2019.)
Therefore, CropEnergies has an ROCE of 8.4%.
View our latest analysis for CropEnergies
Is CropEnergies’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that CropEnergies’s ROCE is fairly close to the Oil and Gas industry average of 10%. Regardless of where CropEnergies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
CropEnergies’s current ROCE of 8.4% is lower than 3 years ago, when the company reported a 17% ROCE. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like CropEnergies are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for CropEnergies.
Do CropEnergies’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
CropEnergies has total liabilities of €105m and total assets of €612m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On CropEnergies’s ROCE
This is good to see, and with a sound ROCE, CropEnergies could be worth a closer look. CropEnergies 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.
I will like CropEnergies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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.