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Today we are going to look at Schweitzer-Mauduit International, Inc. (NYSE:SWM) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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 Schweitzer-Mauduit International:
0.098 = US$132m ÷ (US$1.5b - US$140m) (Based on the trailing twelve months to March 2019.)
Therefore, Schweitzer-Mauduit International has an ROCE of 9.8%.
See our latest analysis for Schweitzer-Mauduit International
Does Schweitzer-Mauduit International Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Schweitzer-Mauduit International's ROCE is around the 11% average reported by the Forestry industry. Separate from how Schweitzer-Mauduit International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how Schweitzer-Mauduit International's past growth compares to other companies.
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. 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 Schweitzer-Mauduit International.