Today we'll evaluate Nabaltec AG (ETR:NTG) 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 of all, we'll work out how to 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.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.'

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 Nabaltec:

0.092 = €19m ÷ (€234m - €26m) (Based on the trailing twelve months to March 2019.)

Therefore, Nabaltec has an ROCE of 9.2%.

Check out our latest analysis for Nabaltec

Is Nabaltec's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Nabaltec's ROCE is fairly close to the Chemicals industry average of 8.1%. Regardless of where Nabaltec sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Nabaltec's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. 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 Nabaltec.

What Are Current Liabilities, And How Do They Affect Nabaltec's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Nabaltec has total liabilities of €26m and total assets of €234m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Nabaltec's ROCE

Overall, Nabaltec has a decent ROCE and could be worthy of further research. Nabaltec 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.