Today we’ll evaluate Wallenius Wilhelmsen ASA (OB:WALWIL) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Wallenius Wilhelmsen:
0.039 = US$286m ÷ (US$7.5b – US$1.2b) (Based on the trailing twelve months to September 2018.)
Therefore, Wallenius Wilhelmsen has an ROCE of 3.9%.
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Is Wallenius Wilhelmsen’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Wallenius Wilhelmsen’s ROCE is meaningfully below the Shipping industry average of 5.7%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Wallenius Wilhelmsen compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.8% available in government bonds. It is likely that there are more attractive prospects out there.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Wallenius Wilhelmsen.
Do Wallenius Wilhelmsen’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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Wallenius Wilhelmsen has total assets of US$7.5b and current liabilities of US$1.2b. As a result, its current liabilities are equal to approximately 16% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
What We Can Learn From Wallenius Wilhelmsen’s ROCE
While that is good to see, Wallenius Wilhelmsen has a low ROCE and does not look attractive in this analysis. Of course you might be able to find a better stock than Wallenius Wilhelmsen. 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.
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 email@example.com.