Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll look at Anton Oilfield Services Group (HKG:3337) 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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?
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 Anton Oilfield Services Group:
0.12 = CN¥473m ÷ (CN¥7.4b – CN¥2.3b) (Based on the trailing twelve months to June 2018.)
So, Anton Oilfield Services Group has an ROCE of 12%.
Does Anton Oilfield Services Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Anton Oilfield Services Group’s ROCE is meaningfully higher than the 6.3% average in the Energy Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Anton Oilfield Services Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Anton Oilfield Services Group has an ROCE of 12%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
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, after all, simply a snap shot of a single year. Remember that most companies like Anton Oilfield Services Group are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Anton Oilfield Services Group.
Anton Oilfield Services Group’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Anton Oilfield Services Group has total liabilities of CN¥2.3b and total assets of CN¥7.4b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Anton Oilfield Services Group has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Anton Oilfield Services Group’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course you might be able to find a better stock than Anton Oilfield Services Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.