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Today we’ll evaluate Sartorius Aktiengesellschaft (

FRA:SRT

) 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 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. 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?

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 Sartorius:

0.15 = €262m ÷ (€2.5b – €498m) (Based on the trailing twelve months to September 2018.)

So,

Sartorius has an ROCE of 15%.

View our latest analysis for Sartorius

Does Sartorius Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Sartorius’s ROCE appears to be around the 13% average of the Medical Equipment industry. Independently of how Sartorius compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

DB:SRT Last Perf February 1st 19

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a

free

report on analyst forecasts for Sartorius

.

Do Sartorius’s Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Story continues

Sartorius has total assets of €2.5b and current liabilities of €498m. As a result, its current liabilities are equal to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Sartorius’s ROCE

Overall, Sartorius has a decent ROCE and could be worthy of further research. Of course

you might be able to find a better stock than Sartorius

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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

[email protected]

.

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