Today we'll evaluate Karamolengos Bakery Industry S.A. (ATH:KMOL) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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.
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 Karamolengos Bakery Industry:
0.046 = €3.6m ÷ (€131m - €52m) (Based on the trailing twelve months to June 2019.)
So, Karamolengos Bakery Industry has an ROCE of 4.6%.
View our latest analysis for Karamolengos Bakery Industry
Is Karamolengos Bakery Industry's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Karamolengos Bakery Industry's ROCE is meaningfully below the Food industry average of 6.0%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Karamolengos Bakery Industry stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Karamolengos Bakery Industry has an ROCE of 4.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Karamolengos Bakery Industry's ROCE compares to its industry, and you can click it to see more detail on its 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 only a point-in-time measure. You can check if Karamolengos Bakery Industry has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Karamolengos Bakery Industry's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Karamolengos Bakery Industry has total liabilities of €52m and total assets of €131m. Therefore its current liabilities are equivalent to approximately 40% of its total assets. Karamolengos Bakery Industry has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
What We Can Learn From Karamolengos Bakery Industry's ROCE
So researching other companies may be a better use of your time. You might be able to find a better investment than Karamolengos Bakery Industry. 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).
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
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January 06, 2020 at 02:30PM
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Shareholders Should Look Hard At Karamolengos Bakery Industry S.A.’s (ATH:KMOL) 4.6%Return On Capital - Yahoo Finance
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