Yahoo Finance What Can We Make Of Exel Composites Oyj’s (HEL:EXL1V) High Return On Capital?
Today we are going to look at Exel Composites Oyj (HEL:EXL1V) to see whether it might be an attractive investment prospect. 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Exel Composites Oyj:
0.12 = €5.2m ÷ (€85m - €43m) (Based on the trailing twelve months to December 2019.)
Therefore, Exel Composites Oyj has an ROCE of 12%.
See our latest analysis for Exel Composites Oyj
Does Exel Composites Oyj Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Exel Composites Oyj's ROCE appears to be substantially greater than the 10% average in the Machinery industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Exel Composites Oyj sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Exel Composites Oyj currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 2.9%. This makes us wonder if the company is improving. The image below shows how Exel Composites Oyj'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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Exel Composites Oyj'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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Exel Composites Oyj has current liabilities of €43m and total assets of €85m. As a result, its current liabilities are equal to approximately 51% of its total assets. Exel Composites Oyj's current liabilities are fairly high, which increases its ROCE significantly.
The Bottom Line On Exel Composites Oyj's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. There might be better investments than Exel Composites Oyj 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
