Today we are going to look at Anton Oilfield Services Group (HKG:3337) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Anton Oilfield Services Group:
0.13 = CN¥662m ÷ (CN¥7.2b - CN¥2.2b) (Based on the trailing twelve months to December 2018.)
Therefore, Anton Oilfield Services Group has an ROCE of 13%.
Does Anton Oilfield Services Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Anton Oilfield Services Group's ROCE is meaningfully higher than the 7.5% average in the Energy Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Anton Oilfield Services Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Anton Oilfield Services Group's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 2.6%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Anton Oilfield Services Group's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Anton Oilfield Services Group could be considered cyclical. 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.
How Anton Oilfield Services Group's Current Liabilities Impact 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¥2.2b and total assets of CN¥7.2b. As a result, its current liabilities are equal to approximately 31% of its total assets. Anton Oilfield Services Group has a medium level of current liabilities, which would boost the ROCE.
Our Take On Anton Oilfield Services Group's ROCE
Anton Oilfield Services Group's ROCE does look good, but the level of current liabilities also contribute to that. Anton Oilfield Services Group 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 Anton Oilfield Services Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.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.