Yahoo Finance Why You Should Care About KWS SAAT SE & Co. KGaA’s (ETR:KWS) Low Return On Capital
Today we'll look at KWS SAAT SE & Co. KGaA (ETR:KWS) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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. Generally speaking a higher ROCE is better. 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?
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 KWS SAAT SE KGaA:
0.059 = €103m ÷ (€2.3b - €538m) (Based on the trailing twelve months to September 2019.)
So, KWS SAAT SE KGaA has an ROCE of 5.9%.
Check out our latest analysis for KWS SAAT SE KGaA
Is KWS SAAT SE KGaA's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, KWS SAAT SE KGaA's ROCE appears meaningfully below the 8.1% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, KWS SAAT SE KGaA's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
KWS SAAT SE KGaA's current ROCE of 5.9% is lower than its ROCE in the past, which was 9.2%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how KWS SAAT SE KGaA's ROCE compares to its industry, and you can click it to see more detail on its 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How KWS SAAT SE KGaA's Current Liabilities Impact 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
KWS SAAT SE KGaA has total assets of €2.3b and current liabilities of €538m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On KWS SAAT SE KGaA's ROCE
That said, KWS SAAT SE KGaA's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
