Today we are going to look at Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Scheerders van Kerchove's Verenigde fabrieken:
0.045 = €1.1m ÷ (€38m - €13m) (Based on the trailing twelve months to December 2018.)
So, Scheerders van Kerchove's Verenigde fabrieken has an ROCE of 4.5%.
View our latest analysis for Scheerders van Kerchove's Verenigde fabrieken
Is Scheerders van Kerchove's Verenigde fabrieken's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Scheerders van Kerchove's Verenigde fabrieken's ROCE appears meaningfully below the 9.0% average reported by the Basic Materials industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Scheerders van Kerchove's Verenigde fabrieken stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
You can see in the image below how Scheerders van Kerchove's Verenigde fabrieken's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Scheerders van Kerchove's Verenigde fabrieken is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.