In This Article:
Today we'll look at Borgestad ASA (OB:BOR) 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, we'll go over how we 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. All else being equal, a better business will have a higher ROCE. 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'.
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 Borgestad:
0.019 = kr24m ÷ (kr1.6b - kr334m) (Based on the trailing twelve months to June 2019.)
Therefore, Borgestad has an ROCE of 1.9%.
See our latest analysis for Borgestad
Is Borgestad's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Borgestad's ROCE is meaningfully below the Basic Materials industry average of 9.1%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Borgestad compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.8% available in government bonds. It is likely that there are more attractive prospects out there.
You can see in the image below how Borgestad's ROCE compares to its industry. Click to see more on past growth.
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. 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 Borgestad.
Do Borgestad's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.