Is Viking Line ABP (HEL:VIK1V) Struggling With Its 3.0% Return On Capital Employed?

Today we'll look at Viking Line ABP (HEL:VIK1V) 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, 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. In the end, ROCE 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 Viking Line ABP:

0.03 = €8.9m ÷ (€469m - €99m) (Based on the trailing twelve months to September 2018.)

So, Viking Line ABP has an ROCE of 3.0%.

View our latest analysis for Viking Line ABP

Does Viking Line ABP Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Viking Line ABP's ROCE appears meaningfully below the 8.4% average reported by the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Viking Line ABP's performance relative to its industry, its ROCE in absolute terms is poor - not much better than government bonds. There are potentially more appealing investments elsewhere.

Viking Line ABP's current ROCE of 3.0% is lower than 3 years ago, when the company reported a 6.2% ROCE. Therefore we wonder if the company is facing new headwinds.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. You can check if Viking Line ABP has cyclical profits by looking at this freegraph of past earnings, revenue and cash flow.

How Viking Line ABP's Current Liabilities Impact 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.

Viking Line ABP has total liabilities of €99m and total assets of €469m. As a result, its current liabilities are equal to approximately 21% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Viking Line ABP's ROCE

While that is good to see, Viking Line ABP has a low ROCE and does not look attractive in this analysis. But note: Viking Line ABP may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you would prefer check out another company -- one with potentially superior financials -- then do not miss thisfree list of interesting companies, that have HIGH return on equity and low debt.

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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.