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A Close Look At Applied Industrial Technologies, Inc.’s (NYSE:AIT) 14% ROCE

Simply Wall St

Today we are going to look at Applied Industrial Technologies, Inc. (NYSE:AIT) 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. 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.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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 Applied Industrial Technologies:

0.14 = US$268m ÷ (US$2.3b - US$424m) (Based on the trailing twelve months to June 2019.)

Therefore, Applied Industrial Technologies has an ROCE of 14%.

View our latest analysis for Applied Industrial Technologies

Is Applied Industrial Technologies's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Applied Industrial Technologies's ROCE is meaningfully better than the 8.8% average in the Trade Distributors 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 Applied Industrial Technologies compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

You can see in the image below how Applied Industrial Technologies's ROCE compares to its industry. Click to see more on past growth.

NYSE:AIT Past Revenue and Net Income, September 25th 2019
NYSE:AIT Past Revenue and Net Income, September 25th 2019

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. 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.

What Are Current Liabilities, And How Do They Affect Applied Industrial Technologies's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Applied Industrial Technologies has total assets of US$2.3b and current liabilities of US$424m. As a result, its current liabilities are equal to approximately 18% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Applied Industrial Technologies's ROCE

With that in mind, Applied Industrial Technologies's ROCE appears pretty good. Applied Industrial Technologies 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.

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.