Today we'll evaluate Bechtle AG (ETR:BC8) to determine whether it could have potential as an investment idea. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Bechtle:
0.15 = €231m ÷ (€2.1b - €647m) (Based on the trailing twelve months to September 2019.)
Therefore, Bechtle has an ROCE of 15%.
Does Bechtle Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Bechtle's ROCE is meaningfully better than the 10% average in the IT 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 Bechtle compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Bechtle's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bechtle.
Bechtle's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Bechtle has total liabilities of €647m and total assets of €2.1b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Bechtle has a medium level of current liabilities, which would boost the ROCE.
Our Take On Bechtle's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Bechtle 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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