Why We’re Not Keen On BHB Brauholding Bayern-Mitte AG’s (FRA:B9B) 3.4% Return On Capital

Today we'll look at BHB Brauholding Bayern-Mitte AG (FRA:B9B) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.'

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 BHB Brauholding Bayern-Mitte:

0.034 = €419k ÷ (€14m - €1.7m) (Based on the trailing twelve months to December 2018.)

Therefore, BHB Brauholding Bayern-Mitte has an ROCE of 3.4%.

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Is BHB Brauholding Bayern-Mitte's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, BHB Brauholding Bayern-Mitte's ROCE appears to be significantly below the 8.0% average in the Beverage industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how BHB Brauholding Bayern-Mitte stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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.

Do BHB Brauholding Bayern-Mitte's Current Liabilities Skew Its ROCE?

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

BHB Brauholding Bayern-Mitte has total liabilities of €1.7m and total assets of €14m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From BHB Brauholding Bayern-Mitte's ROCE

With that in mind, we're not overly impressed with BHB Brauholding Bayern-Mitte's ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.