Today we’ll evaluate NorCom Information Technology GmbH & Co. KGaA (ETR:NC5A) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 NorCom Information Technology GmbH KGaA:
0.069 = €638k ÷ (€15m – €5.8m) (Based on the trailing twelve months to June 2019.)
Therefore, NorCom Information Technology GmbH KGaA has an ROCE of 6.9%.
Is NorCom Information Technology GmbH KGaA’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, NorCom Information Technology GmbH KGaA’s ROCE appears meaningfully below the 8.8% average reported by the IT industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how NorCom Information Technology GmbH KGaA stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that, NorCom Information Technology GmbH KGaA currently has an ROCE of 6.9%, less than the 26% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how NorCom Information Technology GmbH KGaA’s past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is NorCom Information Technology GmbH KGaA? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
NorCom Information Technology GmbH KGaA’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
NorCom Information Technology GmbH KGaA has current liabilities of €5.8m and total assets of €15m. As a result, its current liabilities are equal to approximately 39% of its total assets. NorCom Information Technology GmbH KGaA’s ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On NorCom Information Technology GmbH KGaA’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at [email protected] 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.
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