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Today we'll evaluate paragon GmbH & Co. KGaA (ETR:PGN) 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. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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'.
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 paragon GmbH KGaA:
0.048 = €14m ÷ (€361m - €77m) (Based on the trailing twelve months to March 2019.)
Therefore, paragon GmbH KGaA has an ROCE of 4.8%.
Check out our latest analysis for paragon GmbH KGaA
Does paragon GmbH KGaA Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see paragon GmbH KGaA's ROCE is meaningfully below the Auto Components industry average of 9.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, paragon GmbH KGaA's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
paragon GmbH KGaA's current ROCE of 4.8% is lower than its ROCE in the past, which was 8.1%, 3 years ago. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.