Why ÅF Pöyry AB (publ)’s (STO:AF B) Use Of Investor Capital Doesn’t Look Great

Today we'll evaluate ÅF Pöyry AB (publ) (STO:AF B) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for ÅF Pöyry:

0.075 = kr1.4b ÷ (kr24b - kr6.1b) (Based on the trailing twelve months to September 2019.)

Therefore, ÅF Pöyry has an ROCE of 7.5%.

View our latest analysis for ÅF Pöyry

Is ÅF Pöyry's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, ÅF Pöyry's ROCE appears to be significantly below the 12% average in the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how ÅF Pöyry stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

ÅF Pöyry's current ROCE of 7.5% is lower than 3 years ago, when the company reported a 14% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how ÅF Pöyry's past growth compares to other companies.

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ÅF Pöyry.

Do ÅF Pöyry's Current Liabilities Skew 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

ÅF Pöyry has total liabilities of kr6.1b and total assets of kr24b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On ÅF Pöyry's ROCE

With that in mind, we're not overly impressed with ÅF Pöyry's ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.