In This Article:
Today we’ll look at CTT Systems AB (STO:CTT) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding 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. 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 CTT Systems:
0.39 = kr58m ÷ (kr295m – kr92m) (Based on the trailing twelve months to September 2018.)
So, CTT Systems has an ROCE of 39%.
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Is CTT Systems’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. CTT Systems’s ROCE appears to be substantially greater than the 11% average in the Aerospace & Defense 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. Setting aside the comparison to its industry for a moment, CTT Systems’s ROCE in absolute terms currently looks quite high.
Our data shows that CTT Systems currently has an ROCE of 39%, compared to its ROCE of 26% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CTT Systems.