In This Article:
Today we'll look at Projektengagemang Sweden AB (publ) (STO:PENG B) 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. 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 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Projektengagemang Sweden:
0.059 = kr57m ÷ (kr1.3b - kr355m) (Based on the trailing twelve months to March 2019.)
Therefore, Projektengagemang Sweden has an ROCE of 5.9%.
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Does Projektengagemang Sweden Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Projektengagemang Sweden's ROCE is meaningfully below the Professional Services industry average of 14%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Projektengagemang Sweden's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
As we can see, Projektengagemang Sweden currently has an ROCE of 5.9%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Projektengagemang Sweden is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.