Is There More To Skåne-möllan AB (publ) (STO:SKMO) Than Its 7.6% Returns On Capital?
Today we are going to look at Skåne-möllan AB (publ) (STO:SKMO) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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.
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 Skåne-möllan:
0.076 = kr11m ÷ (kr164m - kr22m) (Based on the trailing twelve months to September 2019.)
So, Skåne-möllan has an ROCE of 7.6%.
See our latest analysis for Skåne-möllan
Is Skåne-möllan's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Skåne-möllan's ROCE is fairly close to the Food industry average of 8.3%. Separate from how Skåne-möllan stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
In our analysis, Skåne-möllan's ROCE appears to be 7.6%, compared to 3 years ago, when its ROCE was 3.7%. This makes us think the business might be improving. The image below shows how Skåne-möllan's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. If Skåne-möllan is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Skåne-möllan's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Skåne-möllan has total assets of kr164m and current liabilities of kr22m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Skåne-möllan's ROCE
That said, Skåne-möllan's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Skåne-möllan. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Skåne-möllan better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
