Today we’ll evaluate Rawlplug S.A. (WSE:RWL) to determine whether it could have potential as an investment idea. 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.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE 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 ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Rawlplug:
0.11 = zł53m ÷ (zł976m – zł360m) (Based on the trailing twelve months to September 2018.)
Therefore, Rawlplug has an ROCE of 11%.
Is Rawlplug’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Rawlplug’s ROCE is meaningfully better than the 8.7% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from how Rawlplug stacks up against its industry, its ROCE in absolute terms is mediocre; not much better than the returns on government bonds. Investors may wish to consider higher-performing investments.
As we can see, Rawlplug currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 7.2%. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Rawlplug.
Rawlplug’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Rawlplug has total assets of zł976m and current liabilities of zł360m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. Rawlplug’s middling level of current liabilities have the effect of boosting its ROCE a bit.
Our Take On Rawlplug’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course you might be able to find a better stock than Rawlplug. So you may wish to see this free collection of other companies that have grown earnings strongly.
Of course Rawlplug may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE 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 email@example.com.