Today we'll look at Mineralbrunnen Überkingen-Teinach GmbH & Co. KGaA (FRA:MUT) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 Mineralbrunnen Überkingen-Teinach GmbH KGaA:

0.097 = €13m ÷ (€142m - €10m) (Based on the trailing twelve months to June 2019.)

Therefore, Mineralbrunnen Überkingen-Teinach GmbH KGaA has an ROCE of 9.7%.

See our latest analysis for Mineralbrunnen Überkingen-Teinach GmbH KGaA

Does Mineralbrunnen Überkingen-Teinach GmbH KGaA Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Mineralbrunnen Überkingen-Teinach GmbH KGaA's ROCE appears to be around the 9.6% average of the Beverage industry. Separate from Mineralbrunnen Überkingen-Teinach GmbH KGaA's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Mineralbrunnen Überkingen-Teinach GmbH KGaA currently has an ROCE of 9.7%, compared to its ROCE of 2.0% 3 years ago. This makes us think the business might be improving. The image below shows how Mineralbrunnen Überkingen-Teinach GmbH KGaA's ROCE compares to its industry, and you can click it to see more detail on its 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 only a point-in-time measure. You can check if Mineralbrunnen Überkingen-Teinach GmbH KGaA has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Mineralbrunnen Überkingen-Teinach GmbH KGaA's Current Liabilities And Their Impact On 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Mineralbrunnen Überkingen-Teinach GmbH KGaA has total liabilities of €10m and total assets of €142m. As a result, its current liabilities are equal to approximately 7.4% of its total assets. With low current liabilities, Mineralbrunnen Überkingen-Teinach GmbH KGaA's decent ROCE looks that much more respectable.

Our Take On Mineralbrunnen Überkingen-Teinach GmbH KGaA's ROCE

This is good to see, and while better prospects may exist, Mineralbrunnen Überkingen-Teinach GmbH KGaA seems worth researching further. Mineralbrunnen Überkingen-Teinach GmbH KGaA shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Mineralbrunnen Überkingen-Teinach GmbH KGaA 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.