Today we are going to look at dormakaba Holding AG (VTX:DOKA) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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 dormakaba Holding:

0.32 = CHF372m ÷ (CHF1.9b - CHF747m) (Based on the trailing twelve months to December 2018.)

So, dormakaba Holding has an ROCE of 32%.

View our latest analysis for dormakaba Holding

Is dormakaba Holding's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, dormakaba Holding's ROCE is meaningfully higher than the 17% average in the Building industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, dormakaba Holding's ROCE is currently very good.

In our analysis, dormakaba Holding's ROCE appears to be 32%, compared to 3 years ago, when its ROCE was 21%. This makes us think the business might be improving. The image below shows how dormakaba Holding's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. 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.