SalMar ASA (OB:SALM) Is Employing Capital Very Effectively

Simply Wall St
·3 min read

Today we'll evaluate SalMar ASA (OB:SALM) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 SalMar:

0.27 = kr3.6b ÷ (kr17b - kr3.8b) (Based on the trailing twelve months to September 2019.)

Therefore, SalMar has an ROCE of 27%.

View our latest analysis for SalMar

Is SalMar's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that SalMar's ROCE is meaningfully better than the 12% average in the Food 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, SalMar's ROCE in absolute terms currently looks quite high.

You can see in the image below how SalMar's ROCE compares to its industry. Click to see more on past growth.

OB:SALM Past Revenue and Net Income, February 26th 2020
OB:SALM Past Revenue and Net Income, February 26th 2020

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for SalMar.

What Are Current Liabilities, And How Do They Affect SalMar's 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.

SalMar has current liabilities of kr3.8b and total assets of kr17b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On SalMar's ROCE

With low current liabilities and a high ROCE, SalMar could be worthy of further investigation. SalMar 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 SalMar 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.