In This Article:
Today we'll look at ROCKWOOL International A/S (CPH:ROCK B) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 ROCKWOOL International:
0.17 = €365m ÷ (€2.5b - €416m) (Based on the trailing twelve months to June 2019.)
Therefore, ROCKWOOL International has an ROCE of 17%.
View our latest analysis for ROCKWOOL International
Is ROCKWOOL International's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that ROCKWOOL International's ROCE is meaningfully better than the 10% average in the Building industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where ROCKWOOL International sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, ROCKWOOL International's ROCE appears to be 17%, compared to 3 years ago, when its ROCE was 13%. This makes us think the business might be improving. You can see in the image below how ROCKWOOL International's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 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 ROCKWOOL International.