Does Burckhardt Compression Holding AG (VTX:BCHN) Create Value For Shareholders?

Simply Wall St

Today we'll evaluate Burckhardt Compression Holding AG (VTX:BCHN) 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Burckhardt Compression Holding:

0.13 = CHF57m ÷ (CHF816m - CHF383m) (Based on the trailing twelve months to September 2019.)

So, Burckhardt Compression Holding has an ROCE of 13%.

Check out our latest analysis for Burckhardt Compression Holding

Does Burckhardt Compression Holding Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Burckhardt Compression Holding's ROCE is fairly close to the Machinery industry average of 14%. Separate from Burckhardt Compression Holding's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how Burckhardt Compression Holding's ROCE compares to its industry. Click to see more on past growth.

SWX:BCHN Past Revenue and Net Income, November 12th 2019
SWX:BCHN Past Revenue and Net Income, November 12th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Burckhardt Compression Holding.

Do Burckhardt Compression Holding's Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Burckhardt Compression Holding has total liabilities of CHF383m and total assets of CHF816m. 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.

What We Can Learn From Burckhardt Compression Holding's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. 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.

I will like Burckhardt Compression Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.