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Why DVS Technology AG’s (ETR:DIS) Use Of Investor Capital Doesn’t Look Great

Today we'll evaluate DVS Technology AG (ETR:DIS) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. 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.

So, How Do We Calculate ROCE?

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 DVS Technology:

0.056 = €14m ÷ (€270m - €26m) (Based on the trailing twelve months to June 2019.)

So, DVS Technology has an ROCE of 5.6%.

See our latest analysis for DVS Technology

Is DVS Technology's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see DVS Technology's ROCE is meaningfully below the Machinery industry average of 9.3%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how DVS Technology stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

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

XTRA:DIS Past Revenue and Net Income, January 26th 2020
XTRA:DIS Past Revenue and Net Income, January 26th 2020

When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. If DVS Technology is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

DVS Technology's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

DVS Technology has total liabilities of €26m and total assets of €270m. Therefore its current liabilities are equivalent to approximately 9.6% of its total assets. With low levels of current liabilities, at least DVS Technology's mediocre ROCE is not unduly boosted.

Our Take On DVS Technology's ROCE

Based on this information, DVS Technology appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.