In This Article:
Today we'll evaluate SBF AG (FRA:CY1K) 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 SBF:
0.11 = €1.6m ÷ (€16m - €1.2m) (Based on the trailing twelve months to December 2018.)
Therefore, SBF has an ROCE of 11%.
Check out our latest analysis for SBF
Does SBF Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that SBF's ROCE is meaningfully better than the 8.7% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where SBF sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
SBF delivered an ROCE of 11%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how SBF's ROCE compares to its industry. Click to see more on 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for SBF.
Do SBF's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.