Today we'll look at EMS-CHEMIE HOLDING AG (VTX:EMSN) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 EMS-CHEMIE HOLDING:
0.30 = CHF626m ÷ (CHF2.5b - CHF404m) (Based on the trailing twelve months to June 2019.)
So, EMS-CHEMIE HOLDING has an ROCE of 30%.
Does EMS-CHEMIE HOLDING Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. EMS-CHEMIE HOLDING's ROCE appears to be substantially greater than the 12% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, EMS-CHEMIE HOLDING's ROCE is currently very good.
You can click on the image below to see (in greater detail) how EMS-CHEMIE HOLDING's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for EMS-CHEMIE HOLDING.
How EMS-CHEMIE HOLDING's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
EMS-CHEMIE HOLDING has total assets of CHF2.5b and current liabilities of CHF404m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
The Bottom Line On EMS-CHEMIE HOLDING's ROCE
With low current liabilities and a high ROCE, EMS-CHEMIE HOLDING could be worthy of further investigation. EMS-CHEMIE HOLDING 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.
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 email@example.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.
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