Today we are going to look at Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.

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 Chocoladefabriken Lindt & Sprüngli:

0.10 = CHF647m ÷ (CHF7.2b - CHF837m) (Based on the trailing twelve months to June 2019.)

So, Chocoladefabriken Lindt & Sprüngli has an ROCE of 10%.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

Is Chocoladefabriken Lindt & Sprüngli's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Chocoladefabriken Lindt & Sprüngli's ROCE appears to be around the 10% average of the Food industry. Separate from Chocoladefabriken Lindt & Sprüngli's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can click on the image below to see (in greater detail) how Chocoladefabriken Lindt & Sprüngli's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Chocoladefabriken Lindt & Sprüngli.

What Are Current Liabilities, And How Do They Affect Chocoladefabriken Lindt & Sprüngli's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Chocoladefabriken Lindt & Sprüngli has total liabilities of CHF837m and total assets of CHF7.2b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Chocoladefabriken Lindt & Sprüngli's ROCE

Overall, Chocoladefabriken Lindt & Sprüngli has a decent ROCE and could be worthy of further research. Chocoladefabriken Lindt & Sprüngli 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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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.

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. Thank you for reading.