Today we'll evaluate Burckhardt Compression Holding AG (VTX:BCHN) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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?
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 Burckhardt Compression Holding:
0.13 = CHF57m ÷ (CHF816m - CHF383m) (Based on the trailing twelve months to September 2019.)
Therefore, Burckhardt Compression Holding has an ROCE of 13%.
See our latest analysis for Burckhardt Compression Holding
Is Burckhardt Compression Holding's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Burckhardt Compression Holding's ROCE is meaningfully higher than the 10.0% average in the Machinery industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Burckhardt Compression Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Burckhardt Compression Holding's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Burckhardt Compression Holding.
What Are Current Liabilities, And How Do They Affect Burckhardt Compression Holding's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Burckhardt Compression Holding has total assets of CHF816m and current liabilities of CHF383m. Therefore its current liabilities are equivalent to approximately 47% of its total assets. With this level of current liabilities, Burckhardt Compression Holding's ROCE is boosted somewhat.
Our Take On Burckhardt Compression Holding's ROCE
Burckhardt Compression Holding's ROCE does look good, but the level of current liabilities also contribute to that. Burckhardt Compression Holding 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.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.