Today we'll look at F-Secure Oyj (HEL:FSC1V) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. In general, businesses with a higher ROCE are usually better quality. 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'.
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 F-Secure Oyj:
0.019 = €2.4m ÷ (€228m - €101m) (Based on the trailing twelve months to June 2019.)
So, F-Secure Oyj has an ROCE of 1.9%.
View our latest analysis for F-Secure Oyj
Does F-Secure Oyj Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, F-Secure Oyj's ROCE appears meaningfully below the 9.5% average reported by the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how F-Secure Oyj stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
F-Secure Oyj's current ROCE of 1.9% is lower than 3 years ago, when the company reported a 23% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how F-Secure Oyj'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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for F-Secure Oyj.