Today we’ll evaluate SJR in Scandinavia AB (publ) (STO:SJR B) 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 SJR in Scandinavia:
0.45 = kr25m ÷ (kr118m – kr63m) (Based on the trailing twelve months to December 2019.)
Therefore, SJR in Scandinavia has an ROCE of 45%.
Is SJR in Scandinavia’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, SJR in Scandinavia’s ROCE is meaningfully higher than the 15% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, SJR in Scandinavia’s ROCE currently appears to be excellent.
We can see that, SJR in Scandinavia currently has an ROCE of 45%, less than the 63% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how SJR in Scandinavia’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
SJR in Scandinavia’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
SJR in Scandinavia has total assets of kr118m and current liabilities of kr63m. Therefore its current liabilities are equivalent to approximately 53% of its total assets. SJR in Scandinavia boasts an attractive ROCE, even after considering the boost from high current liabilities.
Our Take On SJR in Scandinavia’s ROCE
In my book, this business could be worthy of further research. SJR in Scandinavia looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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