Today we’ll look at Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Kulmbacher Brauerei Aktien-Gesellschaft:
0.12 = €12m ÷ (€177m – €70m) (Based on the trailing twelve months to December 2018.)
So, Kulmbacher Brauerei Aktien-Gesellschaft has an ROCE of 12%.
Does Kulmbacher Brauerei Aktien-Gesellschaft Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Kulmbacher Brauerei Aktien-Gesellschaft’s ROCE appears to be substantially greater than the 7.8% average in the Beverage industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Kulmbacher Brauerei Aktien-Gesellschaft sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Kulmbacher Brauerei Aktien-Gesellschaft currently has an ROCE of 12%, compared to its ROCE of 7.7% 3 years ago. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Kulmbacher Brauerei Aktien-Gesellschaft? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Kulmbacher Brauerei Aktien-Gesellschaft’s Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Kulmbacher Brauerei Aktien-Gesellschaft has total liabilities of €70m and total assets of €177m. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Kulmbacher Brauerei Aktien-Gesellschaft has a medium level of current liabilities, which would boost the ROCE.
Our Take On Kulmbacher Brauerei Aktien-Gesellschaft’s ROCE
Kulmbacher Brauerei Aktien-Gesellschaft’s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Kulmbacher Brauerei Aktien-Gesellschaft out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Kulmbacher Brauerei Aktien-Gesellschaft 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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