In This Article:
Today we'll look at B3 Consulting Group AB (publ) (STO:B3) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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'.
How Do You Calculate Return On Capital Employed?
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 B3 Consulting Group:
0.14 = kr39m ÷ (kr524m - kr243m) (Based on the trailing twelve months to September 2019.)
Therefore, B3 Consulting Group has an ROCE of 14%.
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. In this analysis, B3 Consulting Group's ROCE appears meaningfully below the 20% average reported by the IT industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. 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 14% is lower than its ROCE in the past, which was 40%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how B3 Consulting Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for B3 Consulting Group.