Today we'll look at Allied Motion Technologies Inc. (NASDAQ:AMOT) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Allied Motion Technologies:
0.11 = US$28m ÷ (US$308m - US$48m) (Based on the trailing twelve months to September 2019.)
Therefore, Allied Motion Technologies has an ROCE of 11%.
Is Allied Motion Technologies's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Allied Motion Technologies's ROCE is fairly close to the Electrical industry average of 10%. Independently of how Allied Motion Technologies compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Allied Motion Technologies's current ROCE of 11% is lower than its ROCE in the past, which was 14%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Allied Motion Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Allied Motion Technologies's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Allied Motion Technologies has total assets of US$308m and current liabilities of US$48m. As a result, its current liabilities are equal to approximately 16% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Allied Motion Technologies's ROCE
This is good to see, and with a sound ROCE, Allied Motion Technologies could be worth a closer look. Allied Motion Technologies looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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