Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Today we’ll look at Rieter Holding AG (VTX:RIEN) and reflect on its potential as an investment. 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 of all, we’ll work out how to 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Rieter Holding:
0.081 = CHF59m ÷ (CHF1.0b – CHF317m) (Based on the trailing twelve months to June 2018.)
So, Rieter Holding has an ROCE of 8.1%.
See our latest analysis for Rieter Holding
Is Rieter Holding’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Rieter Holding’s ROCE is meaningfully below the Machinery industry average of 14%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Rieter Holding stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Rieter Holding’s current ROCE of 8.1% is lower than 3 years ago, when the company reported a 14% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.