Today we'll evaluate ÅF Pöyry AB (publ) (STO:AF B) 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. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 ÅF Pöyry:
0.075 = kr1.4b ÷ (kr24b - kr6.1b) (Based on the trailing twelve months to September 2019.)
Therefore, ÅF Pöyry has an ROCE of 7.5%.
View our latest analysis for ÅF Pöyry
Is ÅF Pöyry's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, ÅF Pöyry's ROCE appears to be significantly below the 12% average in the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how ÅF Pöyry stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
ÅF Pöyry's current ROCE of 7.5% is lower than 3 years ago, when the company reported a 14% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how ÅF Pöyry'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. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ÅF Pöyry.