Today we'll evaluate Dalhoff Larsen & Horneman A/S (CPH:DLH) to determine whether it could have potential as an investment idea. 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.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.

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 Dalhoff Larsen & Horneman:

0.045 = ø5.0m ÷ (ø143m - ø33m) (Based on the trailing twelve months to June 2019.)

So, Dalhoff Larsen & Horneman has an ROCE of 4.5%.

See our latest analysis for Dalhoff Larsen & Horneman

Does Dalhoff Larsen & Horneman Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Dalhoff Larsen & Horneman's ROCE is meaningfully below the Trade Distributors industry average of 12%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Dalhoff Larsen & Horneman's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Dalhoff Larsen & Horneman has an ROCE of 4.5%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Dalhoff Larsen & Horneman'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Dalhoff Larsen & Horneman has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.