Yahoo Finance Is Axfood AB (publ)’s (STO:AXFO) 27% ROCE Any Good?
Today we'll look at Axfood AB (publ) (STO:AXFO) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of 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 '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. Ultimately, it is a useful but imperfect metric. 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 Axfood:
0.27 = kr2.4b ÷ (kr18b - kr9.2b) (Based on the trailing twelve months to March 2020.)
So, Axfood has an ROCE of 27%.
View our latest analysis for Axfood
Does Axfood Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Axfood's ROCE appears to be substantially greater than the 9.2% average in the Consumer Retailing industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Axfood's ROCE currently appears to be excellent.
We can see that, Axfood currently has an ROCE of 27%, less than the 43% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Axfood'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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Axfood.
What Are Current Liabilities, And How Do They Affect Axfood's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Axfood has total assets of kr18b and current liabilities of kr9.2b. As a result, its current liabilities are equal to approximately 51% of its total assets. While a high level of current liabilities boosts its ROCE, Axfood's returns are still very good.
What We Can Learn From Axfood's ROCE
So we would be interested in doing more research here -- there may be an opportunity! Axfood 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.
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.
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. Thank you for reading.
