Yahoo Finance Why Wagners Holding Company Limited’s (ASX:WGN) Return On Capital Employed Is Impressive
Today we’ll evaluate Wagners Holding Company Limited (ASX:WGN) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is 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. Ultimately, it is a useful but imperfect metric. 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’.
How Do You Calculate Return On Capital Employed?
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 Wagners Holding:
0.32 = AU$41m ÷ (AU$179m – AU$50m) (Based on the trailing twelve months to June 2018.)
So, Wagners Holding has an ROCE of 32%.
Check out our latest analysis for Wagners Holding
Does Wagners Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Wagners Holding’s ROCE appears to be substantially greater than the 13% average in the Basic Materials 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, Wagners Holding’s ROCE in absolute terms currently looks quite high.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Wagners Holding.
What Are Current Liabilities, And How Do They Affect Wagners Holding’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Wagners Holding has total liabilities of AU$50m and total assets of AU$179m. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On Wagners Holding’s ROCE
This is good to see, and with such a high ROCE, Wagners Holding may be worth a closer look. You might be able to find a better buy than Wagners Holding. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
