In This Article:
Today we are going to look at Revenio Group Oyj (HEL:REG1V) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Revenio Group Oyj:
0.10 = €9.1m ÷ (€104m - €17m) (Based on the trailing twelve months to June 2019.)
Therefore, Revenio Group Oyj has an ROCE of 10%.
See our latest analysis for Revenio Group Oyj
Is Revenio Group Oyj's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Revenio Group Oyj's ROCE is around the 12% average reported by the Medical Equipment industry. Separate from Revenio Group Oyj's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that , Revenio Group Oyj currently has an ROCE of 10%, less than the 47% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Revenio Group Oyj'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, 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.
Do Revenio Group Oyj's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.