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Is AST Groupe (EPA:ASP) Creating Value For Shareholders?

Simply Wall St

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Today we are going to look at AST Groupe (EPA:ASP) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.

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 AST Groupe:

0.16 = €12m ÷ (€142m - €67m) (Based on the trailing twelve months to December 2018.)

Therefore, AST Groupe has an ROCE of 16%.

See our latest analysis for AST Groupe

Does AST Groupe Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, AST Groupe's ROCE appears to be around the 14% average of the Consumer Durables industry. Independently of how AST Groupe compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that AST Groupe currently has an ROCE of 16%, compared to its ROCE of 8.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

ENXTPA:ASP Past Revenue and Net Income, March 31st 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do AST Groupe's Current Liabilities Skew 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 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.

AST Groupe has total assets of €142m and current liabilities of €67m. As a result, its current liabilities are equal to approximately 47% of its total assets. AST Groupe has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On AST Groupe's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. You might be able to find a better buy than AST Groupe. 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).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.