Today we'll evaluate HORNBACH Baumarkt AG (FRA:HBM) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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.'
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 HORNBACH Baumarkt:
0.038 = €102m ÷ (€3.6b - €917m) (Based on the trailing twelve months to May 2019.)
So, HORNBACH Baumarkt has an ROCE of 3.8%.
View our latest analysis for HORNBACH Baumarkt
Is HORNBACH Baumarkt's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see HORNBACH Baumarkt's ROCE is meaningfully below the Specialty Retail industry average of 5.5%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, HORNBACH Baumarkt'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.
HORNBACH Baumarkt's current ROCE of 3.8% is lower than 3 years ago, when the company reported a 6.4% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how HORNBACH Baumarkt'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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for HORNBACH Baumarkt.