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Evaluating AdvanSix Inc.’s (NYSE:ASIX) Investments In Its Business

Simply Wall St

Today we'll evaluate AdvanSix Inc. (NYSE:ASIX) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. In brief, it is a useful tool, but it is not without drawbacks. 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 AdvanSix:

0.10 = US$93m ÷ (US$1.2b - US$287m) (Based on the trailing twelve months to September 2019.)

Therefore, AdvanSix has an ROCE of 10%.

Check out our latest analysis for AdvanSix

Does AdvanSix Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, AdvanSix's ROCE appears to be around the 10% average of the Chemicals industry. Regardless of where AdvanSix sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, AdvanSix currently has an ROCE of 10%, less than the 14% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how AdvanSix's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:ASIX Past Revenue and Net Income, January 23rd 2020

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 AdvanSix's 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.

AdvanSix has total assets of US$1.2b and current liabilities of US$287m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On AdvanSix's ROCE

This is good to see, and with a sound ROCE, AdvanSix could be worth a closer look. There might be better investments than AdvanSix out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

AdvanSix is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.