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Is Aptiv PLC’s (NYSE:APTV) 16% Return On Capital Employed Good News?

Simply Wall St

Today we'll look at Aptiv PLC (NYSE:APTV) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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'.

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 Aptiv:

0.16 = US$1.5b ÷ (US$13b - US$3.9b) (Based on the trailing twelve months to September 2019.)

So, Aptiv has an ROCE of 16%.

See our latest analysis for Aptiv

Does Aptiv Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Aptiv's ROCE is around the 15% average reported by the Auto Components industry. Separate from Aptiv's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Aptiv's current ROCE of 16% is lower than its ROCE in the past, which was 25%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Aptiv's ROCE compares to its industry. Click to see more on past growth.

NYSE:APTV Past Revenue and Net Income, January 18th 2020

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 Aptiv'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Aptiv has total assets of US$13b and current liabilities of US$3.9b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Aptiv's ROCE

Overall, Aptiv has a decent ROCE and could be worthy of further research. Aptiv 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.

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

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.