Today we’ll evaluate Pfleiderer Group Spólka Akcyjna (WSE:PFL) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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 Pfleiderer Group Spólka Akcyjna:
0.09 = €62m ÷ (€922m – €229m) (Based on the trailing twelve months to September 2018.)
So, Pfleiderer Group Spólka Akcyjna has an ROCE of 9.0%.
Is Pfleiderer Group Spólka Akcyjna’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Pfleiderer Group Spólka Akcyjna’s ROCE appears to be around the 8.8% average of the Forestry industry. Separate from how Pfleiderer Group Spólka Akcyjna stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Pfleiderer Group Spólka Akcyjna’s current ROCE of 9.0% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pfleiderer Group Spólka Akcyjna.
What Are Current Liabilities, And How Do They Affect Pfleiderer Group Spólka Akcyjna’s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Pfleiderer Group Spólka Akcyjna has total assets of €922m and current liabilities of €229m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Pfleiderer Group Spólka Akcyjna’s ROCE
If Pfleiderer Group Spólka Akcyjna continues to earn an uninspiring ROCE, there may be better places to invest. But note: Pfleiderer Group Spólka Akcyjna may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.