Yahoo Finance Why You Should Like AUDI AG’s (ETR:NSU) ROCE
Today we are going to look at AUDI AG (ETR:NSU) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 AUDI:
0.096 = €4.4b ÷ (€67b - €21b) (Based on the trailing twelve months to June 2019.)
So, AUDI has an ROCE of 9.6%.
See our latest analysis for AUDI
Is AUDI's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that AUDI's ROCE is meaningfully better than the 4.1% average in the Auto industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how AUDI compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
AUDI's current ROCE of 9.6% is lower than 3 years ago, when the company reported a 15% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how AUDI's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If AUDI is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How AUDI's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
AUDI has total assets of €67b and current liabilities of €21b. As a result, its current liabilities are equal to approximately 31% of its total assets. With this level of current liabilities, AUDI's ROCE is boosted somewhat.
What We Can Learn From AUDI's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than AUDI out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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.
