Today we are going to look at Vincit Oyj (HEL:VINCIT) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, 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 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. In brief, it is a useful tool, but it is not without drawbacks. 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?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Vincit Oyj:

0.19 = €4.1m ÷ (€32m - €9.9m) (Based on the trailing twelve months to June 2019.)

Therefore, Vincit Oyj has an ROCE of 19%.

See our latest analysis for Vincit Oyj

Is Vincit Oyj's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Vincit Oyj's ROCE is meaningfully higher than the 7.4% average in the Software industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Vincit Oyj's ROCE in absolute terms currently looks quite high.

Vincit Oyj's current ROCE of 19% is lower than 3 years ago, when the company reported a 27% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Vincit Oyj's ROCE compares to its industry. Click to see more on past growth.

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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Vincit Oyj's Current Liabilities Skew Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Vincit Oyj has total assets of €32m and current liabilities of €9.9m. As a result, its current liabilities are equal to approximately 31% of its total assets. A medium level of current liabilities boosts Vincit Oyj's ROCE somewhat.

The Bottom Line On Vincit Oyj's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. Vincit Oyj 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.

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.