# Why Kulmbacher Brauerei Aktien-Gesellschaft’s (MUN:KUL) Return On Capital Employed Is Impressive

Today we’ll look at Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) 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.

### What is 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. 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?

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 ÷ (€170m – €68m) (Based on the trailing twelve months to June 2018.)

So, Kulmbacher Brauerei Aktien-Gesellschaft has an ROCE of 12%.

### Does Kulmbacher Brauerei Aktien-Gesellschaft Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Kulmbacher Brauerei Aktien-Gesellschaft’s ROCE is meaningfully higher 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. Independently of how Kulmbacher Brauerei Aktien-Gesellschaft compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that Kulmbacher Brauerei Aktien-Gesellschaft currently has an ROCE of 12%, compared to its ROCE of 7.1% 3 years ago. This makes us think the business might be improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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.

### What Are Current Liabilities, And How Do They Affect Kulmbacher Brauerei Aktien-Gesellschaft’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Kulmbacher Brauerei Aktien-Gesellschaft has total assets of €170m and current liabilities of €68m. Therefore its current liabilities are equivalent to approximately 40% 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

While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. 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.

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.

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.