Is Adler Modemärkte AG (ETR:ADD) Investing Your Capital Efficiently?
Today we'll look at Adler Modemärkte AG (ETR:ADD) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.
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 Adler Modemärkte:
0.028 = €8.3m ÷ (€396m - €98m) (Based on the trailing twelve months to June 2019.)
So, Adler Modemärkte has an ROCE of 2.8%.
Check out our latest analysis for Adler Modemärkte
Does Adler Modemärkte Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Adler Modemärkte's ROCE is meaningfully below the Specialty Retail industry average of 5.5%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Adler Modemärkte's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
You can click on the image below to see (in greater detail) how Adler Modemärkte's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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 Adler Modemärkte.
How Adler Modemärkte's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Adler Modemärkte has total liabilities of €98m and total assets of €396m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Adler Modemärkte's ROCE
Adler Modemärkte has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than Adler Modemärkte. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.