How Good Is Q-Free ASA (OB:QFR) At Creating Shareholder Value?

Today we are going to look at Q-Free ASA (OB:QFR) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?

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 Q-Free:

0.15 = øre54m ÷ (øre900m - øre360m) (Based on the trailing twelve months to September 2018.)

So, Q-Free has an ROCE of 15%.

View our latest analysis for Q-Free

Does Q-Free Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Q-Free's ROCE is fairly close to the Electronic industry average of 14%. Separate from Q-Free's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Q-Free has an ROCE of 15%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Q-Free has cyclical profits by looking at this freegraph of past earnings, revenue and cash flow.

Do Q-Free'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 counter this, investors can check if a company has high current liabilities relative to total assets.

Q-Free has total assets of øre900m and current liabilities of øre360m. As a result, its current liabilities are equal to approximately 40% of its total assets. With this level of current liabilities, Q-Free's ROCE is boosted somewhat.

The Bottom Line On Q-Free'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 freelist of companies with modest (or no) debt, trading on a P/E below 20.

If you are like me, then you will not want to miss this freelist of growing companies that insiders are buying.

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.