Guest post: Investment Theory: RoCE – some thoughts on a helpful, but sometimes misleading concept
I am happy to present one of the infrequent guest posts. This time a very interesting general post on RoCE (Return on Capital Employed) and Brand value by contributor Knud Hinkel.
The RoCE is an important ratio for value investors. However, as it regularly relies on balance sheet data, the concept is susceptible for at least two inconsistencies: (1) Items on balance sheet are not correctly reflected in the EBIT, and (2) items that contributed to EBIT are not reflected in the capital employed. My hypothesis is that the RoCEs of industries with significant self-created intangibles like consumer and software companies are subject to a systematic upward bias and this might light lead to a wrong judgment of (1) the underlying company performance, (2) acquisitions, and (3) the capital intensity of the business model.
Full post embedded below: