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Does Wacker Neuson SE (FRA:WAC) Create Value For Shareholders?

Simply Wall St

Today we are going to look at Wacker Neuson SE (FRA:WAC) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 Wacker Neuson:

0.096 = €155m ÷ (€2.2b - €543m) (Based on the trailing twelve months to March 2019.)

Therefore, Wacker Neuson has an ROCE of 9.6%.

View our latest analysis for Wacker Neuson

Does Wacker Neuson Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Wacker Neuson's ROCE is fairly close to the Machinery industry average of 9.7%. Separate from Wacker Neuson's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Wacker Neuson currently has an ROCE of 9.6%, compared to its ROCE of 6.5% 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 Wacker Neuson's past growth compares to other companies.

DB:WAC Past Revenue and Net Income, July 29th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wacker Neuson.

Wacker Neuson's Current Liabilities And Their Impact On Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Wacker Neuson has total liabilities of €543m and total assets of €2.2b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Wacker Neuson's ROCE

Overall, Wacker Neuson has a decent ROCE and could be worthy of further research. Wacker Neuson 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.