Yahoo Finance What Can We Make Of DO & CO Aktiengesellschaft’s (VIE:DOC) High Return On Capital?
Today we'll evaluate DO & CO Aktiengesellschaft (VIE:DOC) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. Generally speaking a higher ROCE is better. 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'.
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 DO & CO:
0.095 = €52m ÷ (€747m - €198m) (Based on the trailing twelve months to June 2019.)
Therefore, DO & CO has an ROCE of 9.5%.
View our latest analysis for DO & CO
Is DO & CO's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, DO & CO's ROCE is meaningfully higher than the 7.4% average in the Hospitality industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how DO & CO compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, DO & CO currently has an ROCE of 9.5%, less than the 13% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how DO & CO's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for DO & CO.
What Are Current Liabilities, And How Do They Affect DO & CO'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
DO & CO has total assets of €747m and current liabilities of €198m. As a result, its current liabilities are equal to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On DO & CO's ROCE
With that in mind, DO & CO's ROCE appears pretty good. There might be better investments than DO & CO out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
