Do You Know About AGCO Corporation’s (NYSE:AGCO) ROCE?
Today we'll look at AGCO Corporation (NYSE:AGCO) and reflect on its potential as an investment. 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 AGCO:
0.11 = US$559m ÷ (US$8.4b - US$3.2b) (Based on the trailing twelve months to June 2019.)
Therefore, AGCO has an ROCE of 11%.
View our latest analysis for AGCO
Does AGCO Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see AGCO's ROCE is around the 12% average reported by the Machinery industry. Independently of how AGCO compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that AGCO currently has an ROCE of 11%, compared to its ROCE of 6.4% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how AGCO's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. 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 AGCO's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
AGCO has total assets of US$8.4b and current liabilities of US$3.2b. As a result, its current liabilities are equal to approximately 38% of its total assets. AGCO has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On AGCO's ROCE
AGCO's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than AGCO 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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 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.
