Today we'll evaluate Andersen & Martini Holding A/S (CPH:AM B) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Andersen & Martini Holding:
0.046 = ø8.9m ÷ (ø335m - ø141m) (Based on the trailing twelve months to December 2018.)
Therefore, Andersen & Martini Holding has an ROCE of 4.6%.
See our latest analysis for Andersen & Martini Holding
Is Andersen & Martini Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Andersen & Martini Holding's ROCE appears meaningfully below the 8.8% average reported by the Specialty Retail industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Andersen & Martini Holding'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.
Andersen & Martini Holding's current ROCE of 4.6% is lower than its ROCE in the past, which was 6.6%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Andersen & Martini Holding's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. How cyclical is Andersen & Martini Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.