Today we'll evaluate Ilkka-Yhtymä Oyj (HEL:ILK2S) to determine whether it could have potential as an investment idea. 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. 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Ilkka-Yhtymä Oyj:
0.012 = €1.5m ÷ (€138m - €18m) (Based on the trailing twelve months to June 2019.)
Therefore, Ilkka-Yhtymä Oyj has an ROCE of 1.2%.
Check out our latest analysis for Ilkka-Yhtymä Oyj
Is Ilkka-Yhtymä Oyj's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Ilkka-Yhtymä Oyj's ROCE appears to be significantly below the 10% average in the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Ilkka-Yhtymä Oyj compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.5% available in government bonds. Readers may wish to look for more rewarding investments.
Ilkka-Yhtymä Oyj's current ROCE of 1.2% is lower than its ROCE in the past, which was 4.2%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Ilkka-Yhtymä Oyj'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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.