In This Article:
Today we are going to look at IBU-tec advanced materials AG (FRA:IBU) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect 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. 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?
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 IBU-tec advanced materials:
0.022 = €165k ÷ (€39m – €1.2m) (Based on the trailing twelve months to June 2018.)
So, IBU-tec advanced materials has an ROCE of 2.2%.
View our latest analysis for IBU-tec advanced materials
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Does IBU-tec advanced materials Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, IBU-tec advanced materials’s ROCE appears to be significantly below the 11% average in the Chemicals industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside IBU-tec advanced materials’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
IBU-tec advanced materials’s current ROCE of 2.2% is lower than 3 years ago, when the company reported a 22% ROCE. Therefore we wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for IBU-tec advanced materials.