Why We’re Not Keen On Bertrandt Aktiengesellschaft’s (FRA:BDT) 11% Return On Capital

Simply Wall St

Sun, Jul 14, 2019, 10:10 PM

Today we'll evaluate Bertrandt Aktiengesellschaft (FRA:BDT) to determine whether it could have potential as an investment idea. 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. Then we'll determine how its current liabilities are affecting 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. 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'.

How Do You Calculate Return On Capital Employed?

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 Bertrandt:

0.11 = €69m ÷ (€771m - €142m) (Based on the trailing twelve months to March 2019.)

So, Bertrandt has an ROCE of 11%.

See our latest analysis for Bertrandt

Is Bertrandt's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Bertrandt's ROCE appears meaningfully below the 15% average reported by the Professional Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of where Bertrandt sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that , Bertrandt currently has an ROCE of 11%, less than the 16% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Bertrandt's past growth compares to other companies.

DB:BDT Past Revenue and Net Income, July 15th 2019

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bertrandt.