In This Article:
Today we'll look at Drillcon AB (publ) (STO:DRIL) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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?
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 Drillcon:
0.19 = kr36m ÷ (kr311m - kr120m) (Based on the trailing twelve months to September 2019.)
Therefore, Drillcon has an ROCE of 19%.
See our latest analysis for Drillcon
Does Drillcon Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Drillcon's ROCE is meaningfully higher than the 14% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Drillcon's ROCE currently appears to be excellent.
Our data shows that Drillcon currently has an ROCE of 19%, compared to its ROCE of 8.3% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Drillcon's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Drillcon could be considered cyclical. How cyclical is Drillcon? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.