Yahoo Finance Do You Know About FRIWO AG’s (ETR:CEA) ROCE?
Today we'll look at FRIWO AG (ETR:CEA) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 FRIWO:
0.087 = €2.6m ÷ (€61m - €31m) (Based on the trailing twelve months to June 2019.)
So, FRIWO has an ROCE of 8.7%.
View our latest analysis for FRIWO
Is FRIWO's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see FRIWO's ROCE is around the 8.7% average reported by the Electrical industry. Regardless of where FRIWO 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, FRIWO currently has an ROCE of 8.7%, less than the 13% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how FRIWO's ROCE compares to its industry. Click to see more on past growth.
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. If FRIWO is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do FRIWO's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
FRIWO has total assets of €61m and current liabilities of €31m. As a result, its current liabilities are equal to approximately 51% of its total assets. FRIWO has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On FRIWO's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. FRIWO looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
