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Is AdvanSix Inc.’s (NYSE:ASIX) Return On Capital Employed Any Good?

Simply Wall St

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Today we are going to look at AdvanSix Inc. (NYSE:ASIX) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. 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 AdvanSix:

0.12 = US$93m ÷ (US$1.0b - US$285m) (Based on the trailing twelve months to December 2018.)

So, AdvanSix has an ROCE of 12%.

Check out our latest analysis for AdvanSix

Does AdvanSix Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that AdvanSix's ROCE is fairly close to the Chemicals industry average of 12%. Regardless of where AdvanSix sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

NYSE:ASIX Past Revenue and Net Income, April 8th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How AdvanSix's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

AdvanSix has total assets of US$1.0b and current liabilities of US$285m. Therefore its current liabilities are equivalent to approximately 28% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On AdvanSix's ROCE

This is good to see, and with a sound ROCE, AdvanSix could be worth a closer look. You might be able to find a better buy than AdvanSix. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like AdvanSix better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.