Today we’ll look at Allgäuer Brauhaus AG (MUN:ALB) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. 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. In brief, ROCE 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’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Allgäuer Brauhaus:
0.082 = €620k ÷ (€16m – €8.4m) (Based on the trailing twelve months to December 2017.)
Therefore, Allgäuer Brauhaus has an ROCE of 8.2%.
Is Allgäuer Brauhaus’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Allgäuer Brauhaus’s ROCE is around the 7.7% average reported by the Beverage industry. Separate from how Allgäuer Brauhaus stacks up against its industry, its ROCE in absolute terms is mediocre; not much better than the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If Allgäuer Brauhaus is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Allgäuer Brauhaus’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.
Allgäuer Brauhaus has total liabilities of €8.4m and total assets of €16m. Therefore its current liabilities are equivalent to approximately 53% of its total assets. With a high level of current liabilities, Allgäuer Brauhaus will experience a boost to its ROCE.
Our Take On Allgäuer Brauhaus’s ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. 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.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.