In This Article:
Today we'll evaluate Hansen Technologies Limited (ASX:HSN) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?
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 Hansen Technologies:
0.063 = AU$30m ÷ (AU$545m - AU$65m) (Based on the trailing twelve months to June 2019.)
So, Hansen Technologies has an ROCE of 6.3%.
See our latest analysis for Hansen Technologies
Does Hansen Technologies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Hansen Technologies's ROCE appears to be significantly below the 17% average in the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Hansen Technologies'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.
Hansen Technologies's current ROCE of 6.3% is lower than 3 years ago, when the company reported a 26% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Hansen Technologies's past growth compares to other companies.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hansen Technologies.