In This Article:
Today we'll look at NTR Holding A/S (CPH:NTR B) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
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.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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.
How Do You Calculate Return On Capital Employed?
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 NTR Holding:
0.058 = ø8.1m ÷ (ø159m - ø20m) (Based on the trailing twelve months to June 2019.)
Therefore, NTR Holding has an ROCE of 5.8%.
See our latest analysis for NTR Holding
Does NTR Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see NTR Holding's ROCE is meaningfully below the Electrical industry average of 11%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, NTR Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, NTR Holding currently has an ROCE of 5.8% compared to its ROCE 3 years ago, which was 2.2%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how NTR Holding's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If NTR Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do NTR Holding's Current Liabilities Skew Its 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.