In This Article:
Today we are going to look at Verkkokauppa.com Oyj (HEL:VERK) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Verkkokauppa.com Oyj:
0.21 = €12m ÷ (€127m - €70m) (Based on the trailing twelve months to June 2019.)
So, Verkkokauppa.com Oyj has an ROCE of 21%.
Check out our latest analysis for Verkkokauppa.com Oyj
Is Verkkokauppa.com Oyj's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Verkkokauppa.com Oyj's ROCE is meaningfully higher than the 12% average in the Online Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Verkkokauppa.com Oyj's ROCE is currently very good.
We can see that , Verkkokauppa.com Oyj currently has an ROCE of 21%, less than the 35% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Verkkokauppa.com 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.