Yahoo Finance Are Novotek AB’s Returns On Capital Worth Investigating?
Today we'll evaluate Novotek AB (STO:NTEK B) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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'.
So, How Do We Calculate ROCE?
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 Novotek:
0.25 = kr35m ÷ (kr239m - kr99m) (Based on the trailing twelve months to December 2019.)
So, Novotek has an ROCE of 25%.
Check out our latest analysis for Novotek
Is Novotek's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Novotek's ROCE appears to be around the 21% average of the IT industry. Regardless of the industry comparison, in absolute terms, Novotek's ROCE currently appears to be excellent.
You can see in the image below how Novotek's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. If Novotek is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Novotek'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 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.
Novotek has total assets of kr239m and current liabilities of kr99m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. Novotek has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On Novotek's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Novotek 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.
I will like Novotek better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
