Here's What Kulmbacher Brauerei Aktien-Gesellschaft's (MUN:KUL) ROCE Can Tell Us

Simply Wall St

Mon, Jun 10, 2019, 1:33 AM

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Today we'll look at Kulmbacher Brauerei Aktien-Gesellschaft (MUN:KUL) 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.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Kulmbacher Brauerei Aktien-Gesellschaft:

0.12 = €12m ÷ (€177m - €70m) (Based on the trailing twelve months to December 2018.)

So, Kulmbacher Brauerei Aktien-Gesellschaft has an ROCE of 12%.

See our latest analysis for Kulmbacher Brauerei Aktien-Gesellschaft

Is Kulmbacher Brauerei Aktien-Gesellschaft's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Kulmbacher Brauerei Aktien-Gesellschaft's ROCE is meaningfully higher than the 8.3% average in the Beverage industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Kulmbacher Brauerei Aktien-Gesellschaft's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Kulmbacher Brauerei Aktien-Gesellschaft currently has an ROCE of 12%, compared to its ROCE of 7.7% 3 years ago. This makes us think the business might be improving.

MUN:KUL Past Revenue and Net Income, June 10th 2019

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. ROCE is, after all, simply a snap shot of a single year. If Kulmbacher Brauerei Aktien-Gesellschaft is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Kulmbacher Brauerei Aktien-Gesellschaft's 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Kulmbacher Brauerei Aktien-Gesellschaft has total liabilities of €70m and total assets of €177m. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Kulmbacher Brauerei Aktien-Gesellschaft has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Kulmbacher Brauerei Aktien-Gesellschaft's ROCE

Kulmbacher Brauerei Aktien-Gesellschaft's ROCE does look good, but the level of current liabilities also contribute to that. Kulmbacher Brauerei Aktien-Gesellschaft looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Kulmbacher Brauerei Aktien-Gesellschaft better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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