Projektengagemang Sweden AB (publ)’s (STO:PENG B) Investment Returns Are Lagging Its Industry
Today we'll look at Projektengagemang Sweden AB (publ) (STO:PENG B) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. 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 Projektengagemang Sweden:
0.059 = kr57m ÷ (kr1.3b - kr355m) (Based on the trailing twelve months to March 2019.)
Therefore, Projektengagemang Sweden has an ROCE of 5.9%.
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Does Projektengagemang Sweden Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Projektengagemang Sweden's ROCE is meaningfully below the Professional Services industry average of 14%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Projektengagemang Sweden's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
As we can see, Projektengagemang Sweden currently has an ROCE of 5.9%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. ROCE is only a point-in-time measure. If Projektengagemang Sweden is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Projektengagemang Sweden's Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Projektengagemang Sweden has total liabilities of kr355m and total assets of kr1.3b. As a result, its current liabilities are equal to approximately 27% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Projektengagemang Sweden's ROCE
If Projektengagemang Sweden continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
