In This Article:
Today we'll look at Bergman & Beving AB (publ) (STO:BERG B) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.
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 Bergman & Beving:
0.071 = kr220m ÷ (kr4.5b - kr1.4b) (Based on the trailing twelve months to June 2019.)
So, Bergman & Beving has an ROCE of 7.1%.
See our latest analysis for Bergman & Beving
Is Bergman & Beving's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Bergman & Beving's ROCE appears meaningfully below the 12% average reported by the Trade Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Bergman & Beving's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Bergman & Beving's current ROCE of 7.1% is lower than its ROCE in the past, which was 11%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Bergman & Beving's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Bergman & Beving.