Yahoo Finance Are AB Electrolux (publ)’s (STO:ELUX B) Returns Worth Your While?
Today we'll evaluate AB Electrolux (publ) (STO:ELUX 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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'.
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 AB Electrolux:
0.14 = kr5.9b ÷ (kr102b - kr59b) (Based on the trailing twelve months to June 2019.)
So, AB Electrolux has an ROCE of 14%.
Check out our latest analysis for AB Electrolux
Does AB Electrolux Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that AB Electrolux's ROCE is fairly close to the Consumer Durables industry average of 14%. Independently of how AB Electrolux compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how AB Electrolux's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for AB Electrolux.
What Are Current Liabilities, And How Do They Affect AB Electrolux's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
AB Electrolux has total liabilities of kr59b and total assets of kr102b. As a result, its current liabilities are equal to approximately 58% of its total assets. AB Electrolux has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On AB Electrolux's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. AB Electrolux shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
