Yahoo Finanza What Can We Make Of DWS Limited’s (ASX:DWS) High Return On Capital?
Today we are going to look at DWS Limited (ASX:DWS) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 DWS:
0.16 = AU$19m ÷ (AU$146m - AU$25m) (Based on the trailing twelve months to December 2019.)
Therefore, DWS has an ROCE of 16%.
Check out our latest analysis for DWS
Does DWS Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. DWS's ROCE appears to be substantially greater than the 11% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how DWS compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, DWS currently has an ROCE of 16%, less than the 30% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how DWS'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, after all, simply a snap shot of a single year. You can check if DWS 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 DWS's 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.
DWS has current liabilities of AU$25m and total assets of AU$146m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On DWS's ROCE
This is good to see, and with a sound ROCE, DWS could be worth a closer look. There might be better investments than DWS out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
