Is Firma Oponiarska Debica Spólka Akcyjna (WSE:DBC) Creating Value For Shareholders?

Today we'll evaluate Firma Oponiarska Debica Spólka Akcyjna (WSE:DBC) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Firma Oponiarska Debica Spólka Akcyjna:

0.087 = zł100m ÷ (zł1.7b - zł540m) (Based on the trailing twelve months to December 2018.)

So, Firma Oponiarska Debica Spólka Akcyjna has an ROCE of 8.7%.

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Is Firma Oponiarska Debica Spólka Akcyjna's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Firma Oponiarska Debica Spólka Akcyjna's ROCE appears to be around the 9.8% average of the Auto Components industry. Aside from the industry comparison, Firma Oponiarska Debica Spólka Akcyjna's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Firma Oponiarska Debica Spólka Akcyjna has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Firma Oponiarska Debica Spólka Akcyjna's Current Liabilities Skew Its ROCE?

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

Firma Oponiarska Debica Spólka Akcyjna has total assets of zł1.7b and current liabilities of zł540m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Firma Oponiarska Debica Spólka Akcyjna's middling level of current liabilities have the effect of boosting its ROCE a bit.

Our Take On Firma Oponiarska Debica Spólka Akcyjna's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Firma Oponiarska Debica Spólka Akcyjna. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.