How Do Konecranes Plc’s (HEL:KCR) Returns On Capital Compare To Peers?

Today we’ll evaluate Konecranes Plc (HEL:KCR) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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’.

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 Konecranes:

0.078 = €180m ÷ (€3.6b – €1.3b) (Based on the trailing twelve months to December 2018.)

So, Konecranes has an ROCE of 7.8%.

View our latest analysis for Konecranes

Is Konecranes’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Konecranes’s ROCE appears meaningfully below the 13% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Konecranes’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Konecranes’s current ROCE of 7.8% is lower than its ROCE in the past, which was 16%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

HLSE:KCR Past Revenue and Net Income, March 11th 2019
HLSE:KCR Past Revenue and Net Income, March 11th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Konecranes.

How Konecranes’s Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Konecranes has total assets of €3.6b and current liabilities of €1.3b. As a result, its current liabilities are equal to approximately 35% of its total assets. Konecranes has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Konecranes’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better buy than Konecranes. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.