Today we'll evaluate Aspire Global plc (STO:ASPIRE) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Aspire Global:
0.28 = €18m ÷ (€101m - €38m) (Based on the trailing twelve months to December 2019.)
So, Aspire Global has an ROCE of 28%.
Is Aspire Global's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Aspire Global's ROCE is meaningfully higher than the 15% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Aspire Global's ROCE in absolute terms currently looks quite high.
We can see that, Aspire Global currently has an ROCE of 28%, less than the 38% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Aspire Global's past growth compares to other companies.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Aspire Global.
Aspire Global's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Aspire Global has current liabilities of €38m and total assets of €101m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. Aspire Global's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Aspire Global's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Aspire Global shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Aspire Global 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 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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