Today we’ll look at Viking Line ABP (HEL:VIK1V) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 Viking Line ABP:
0.025 = €9.3m ÷ (€467m – €96m) (Based on the trailing twelve months to December 2018.)
So, Viking Line ABP has an ROCE of 2.5%.
Is Viking Line ABP’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Viking Line ABP’s ROCE is meaningfully below the Hospitality industry average of 8.3%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Viking Line ABP stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Viking Line ABP’s current ROCE of 2.5% is lower than its ROCE in the past, which was 6.1%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. You can check if Viking Line ABP has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Viking Line ABP’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Viking Line ABP has total assets of €467m and current liabilities of €96m. As a result, its current liabilities are equal to approximately 20% 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
That’s not a bad thing, however Viking Line ABP has a weak ROCE and may not be an attractive investment. Of course you might be able to find a better stock than Viking Line ABP. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.