Yahoo Finance DMG MORI AKTIENGESELLSCHAFT (ETR:GIL) Is Employing Capital Very Effectively
Today we are going to look at DMG MORI AKTIENGESELLSCHAFT (ETR:GIL) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 DMG MORI:
0.16 = €222m ÷ (€2.5b - €1.1b) (Based on the trailing twelve months to September 2019.)
So, DMG MORI has an ROCE of 16%.
View our latest analysis for DMG MORI
Does DMG MORI Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that DMG MORI's ROCE is meaningfully better than the 9.4% average in the Machinery 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. Regardless of where DMG MORI sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that DMG MORI currently has an ROCE of 16%, compared to its ROCE of 11% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how DMG MORI'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if DMG MORI has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect DMG MORI's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
DMG MORI has total assets of €2.5b and current liabilities of €1.1b. As a result, its current liabilities are equal to approximately 43% of its total assets. DMG MORI has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On DMG MORI's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than DMG MORI 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.
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.
