Is CEWE Stiftung & Co. KGaA’s (ETR:CWC) 17% ROCE Any Good?

Today we'll evaluate CEWE Stiftung & Co. KGaA (ETR:CWC) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 CEWE Stiftung KGaA:

0.17 = €57m ÷ (€515m - €183m) (Based on the trailing twelve months to September 2019.)

So, CEWE Stiftung KGaA has an ROCE of 17%.

View our latest analysis for CEWE Stiftung KGaA

Does CEWE Stiftung KGaA Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that CEWE Stiftung KGaA's ROCE is meaningfully better than the 14% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how CEWE Stiftung KGaA compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how CEWE Stiftung KGaA'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.

What Are Current Liabilities, And How Do They Affect CEWE Stiftung KGaA's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

CEWE Stiftung KGaA has total assets of €515m and current liabilities of €183m. As a result, its current liabilities are equal to approximately 36% of its total assets. CEWE Stiftung KGaA has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From CEWE Stiftung KGaA's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. CEWE Stiftung KGaA 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.