What Can We Make Of Per Aarsleff Holding A/S’s (CPH:PAAL B) High Return On Capital?

Today we'll evaluate Per Aarsleff Holding A/S (CPH:PAAL B) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?

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 Per Aarsleff Holding:

0.13 = ø575m ÷ (ø8.4b - ø4.1b) (Based on the trailing twelve months to December 2019.)

Therefore, Per Aarsleff Holding has an ROCE of 13%.

See our latest analysis for Per Aarsleff Holding

Is Per Aarsleff Holding's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Per Aarsleff Holding's ROCE is meaningfully better than the 9.9% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Per Aarsleff Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Per Aarsleff Holding's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Per Aarsleff Holding.

What Are Current Liabilities, And How Do They Affect Per Aarsleff Holding'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.

Per Aarsleff Holding has total assets of ø8.4b and current liabilities of ø4.1b. As a result, its current liabilities are equal to approximately 49% of its total assets. Per Aarsleff Holding has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From Per Aarsleff Holding's ROCE

Per Aarsleff Holding's ROCE does look good, but the level of current liabilities also contribute to that. Per Aarsleff Holding shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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.