Today we'll evaluate Komax Holding AG (VTX:KOMN) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. 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 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. 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?
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 Komax Holding:
0.12 = CHF47m ÷ (CHF460m - CHF77m) (Based on the trailing twelve months to June 2019.)
So, Komax Holding has an ROCE of 12%.
Check out our latest analysis for Komax Holding
Does Komax Holding Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Komax Holding's ROCE appears to be around the 14% average of the Machinery industry. Regardless of where Komax Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Komax Holding's current ROCE of 12% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Komax Holding'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. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Komax Holding.
Komax Holding's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.