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Today we'll evaluate Österreichische Staatsdruckerei Holding AG (VIE:OESD) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 amount of pre-tax profits a company can generate from the 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. 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 Österreichische Staatsdruckerei Holding:
0.15 = €5.4m ÷ (€57m - €21m) (Based on the trailing twelve months to September 2018.)
Therefore, Österreichische Staatsdruckerei Holding has an ROCE of 15%.
Check out our latest analysis for Österreichische Staatsdruckerei Holding
Is Österreichische Staatsdruckerei Holding's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Österreichische Staatsdruckerei Holding's ROCE appears to be around the 13% average of the Electronic industry. Regardless of where Österreichische Staatsdruckerei Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Österreichische Staatsdruckerei Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Österreichische Staatsdruckerei Holding's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.