Is EnBW Energie Baden-Württemberg AG (ETR:EBK) Investing Your Capital Efficiently?

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Today we’ll evaluate EnBW Energie Baden-Württemberg AG (ETR:EBK) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 EnBW Energie Baden-Württemberg:

0.012 = €358m ÷ (€40b – €9.3b) (Based on the trailing twelve months to September 2019.)

So, EnBW Energie Baden-Württemberg has an ROCE of 1.2%.

Check out our latest analysis for EnBW Energie Baden-Württemberg

Is EnBW Energie Baden-Württemberg’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, EnBW Energie Baden-Württemberg’s ROCE appears to be significantly below the 6.7% average in the Electric Utilities industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how EnBW Energie Baden-Württemberg compares to its industry, its ROCE in absolute terms is low; especially compared to the ~-0.4% available in government bonds. Readers may wish to look for more rewarding investments.

We can see that, EnBW Energie Baden-Württemberg currently has an ROCE of 1.2%, less than the 2.1% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how EnBW Energie Baden-Württemberg’s past growth compares to other companies.

XTRA:EBK Past Revenue and Net Income, March 20th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. If EnBW Energie Baden-Württemberg is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do EnBW Energie Baden-Württemberg’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

EnBW Energie Baden-Württemberg has current liabilities of €9.3b and total assets of €40b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

What We Can Learn From EnBW Energie Baden-Württemberg’s ROCE

While that is good to see, EnBW Energie Baden-Württemberg has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than EnBW Energie Baden-Württemberg. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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