Today we'll look at Energiedienst Holding AG (VTX:EDHN) 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. 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. 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'.
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 Energiedienst Holding:
0.019 = €22m ÷ (€1.3b - €186m) (Based on the trailing twelve months to June 2019.)
Therefore, Energiedienst Holding has an ROCE of 1.9%.
See our latest analysis for Energiedienst Holding
Is Energiedienst Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Energiedienst Holding's ROCE is meaningfully below the Electric Utilities industry average of 6.8%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Energiedienst Holding stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Energiedienst Holding's current ROCE of 1.9% is lower than 3 years ago, when the company reported a 3.3% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Energiedienst Holding's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Energiedienst Holding.