Today we'll evaluate Starrag Group Holding AG (VTX:STGN) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Starrag Group Holding:
0.078 = CHF15m ÷ (CHF364m - CHF168m) (Based on the trailing twelve months to June 2019.)
Therefore, Starrag Group Holding has an ROCE of 7.8%.
Check out our latest analysis for Starrag Group Holding
Is Starrag Group Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Starrag Group Holding's ROCE appears to be significantly below the 14% average in the Machinery industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Starrag Group Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , Starrag Group Holding currently has an ROCE of 7.8% compared to its ROCE 3 years ago, which was 5.9%. This makes us wonder if the company is improving. You can see in the image below how Starrag Group Holding'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. 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Starrag Group Holding.