In This Article:
Today we'll evaluate CTT Systems AB (STO:CTT) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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'.
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 CTT Systems:
0.46 = kr108m ÷ (kr318m - kr86m) (Based on the trailing twelve months to June 2019.)
So, CTT Systems has an ROCE of 46%.
See our latest analysis for CTT Systems
Does CTT Systems Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. CTT Systems's ROCE appears to be substantially greater than the 11% average in the Aerospace & Defense industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, CTT Systems's ROCE is currently very good.
Our data shows that CTT Systems currently has an ROCE of 46%, compared to its ROCE of 21% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how CTT Systems's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CTT Systems.
What Are Current Liabilities, And How Do They Affect CTT Systems's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.