Today we'll look at Addtech AB (publ.) (STO:ADDT B) 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. 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. Generally speaking a higher ROCE is better. 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 Addtech AB (publ.):

0.21 = kr976m ÷ (kr7.9b - kr3.3b) (Based on the trailing twelve months to June 2019.)

Therefore, Addtech AB (publ.) has an ROCE of 21%.

See our latest analysis for Addtech AB (publ.)

Is Addtech AB (publ.)'s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Addtech AB (publ.)'s ROCE is meaningfully better than the 14% average in the Trade Distributors 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, Addtech AB (publ.)'s ROCE in absolute terms currently looks quite high.

You can see in the image below how Addtech AB (publ.)'s ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.

What Are Current Liabilities, And How Do They Affect Addtech AB (publ.)'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. 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.

Addtech AB (publ.) has total assets of kr7.9b and current liabilities of kr3.3b. As a result, its current liabilities are equal to approximately 41% of its total assets. A medium level of current liabilities boosts Addtech AB (publ.)'s ROCE somewhat.

What We Can Learn From Addtech AB (publ.)'s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Addtech AB (publ.) 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 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.