Yahoo Finance Why We Like DMG MORI AKTIENGESELLSCHAFT’s (ETR:GIL) 15% Return On Capital Employed
Today we are going to look at DMG MORI AKTIENGESELLSCHAFT (ETR:GIL) to see whether it might be an attractive investment prospect. 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.
First up, we'll look at what ROCE is and how we calculate it. 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.
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 DMG MORI:
0.15 = €215m ÷ (€2.5b - €1.0b) (Based on the trailing twelve months to December 2019.)
Therefore, DMG MORI has an ROCE of 15%.
Check out our latest analysis for DMG MORI
Is DMG MORI's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. DMG MORI's ROCE appears to be substantially greater than the 8.3% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where DMG MORI sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how DMG MORI's ROCE compares to its industry. Click to see more on 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If DMG MORI is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How DMG MORI'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.
DMG MORI has current liabilities of €1.0b and total assets of €2.5b. As a result, its current liabilities are equal to approximately 42% of its total assets. DMG MORI has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On DMG MORI's ROCE
DMG MORI's ROCE does look good, but the level of current liabilities also contribute to that. DMG MORI looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
