Is B3 Consulting Group AB (publ)'s (STO:B3) Capital Allocation Ability Worth Your Time?

Today we'll look at B3 Consulting Group AB (publ) (STO:B3) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

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?

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 B3 Consulting Group:

0.17 = kr41m ÷ (kr487m - kr244m) (Based on the trailing twelve months to June 2019.)

So, B3 Consulting Group has an ROCE of 17%.

View our latest analysis for B3 Consulting Group

Is B3 Consulting Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, B3 Consulting Group's ROCE appears to be around the 18% average of the IT industry. Independently of how B3 Consulting Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

B3 Consulting Group's current ROCE of 17% is lower than its ROCE in the past, which was 39%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 B3 Consulting Group.

What Are Current Liabilities, And How Do They Affect B3 Consulting Group's 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

B3 Consulting Group has total liabilities of kr244m and total assets of kr487m. As a result, its current liabilities are equal to approximately 50% of its total assets. B3 Consulting Group has a relatively high level of current liabilities, boosting its ROCE meaningfully.

Our Take On B3 Consulting Group's ROCE

While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than B3 Consulting Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.