Today we are going to look at Autoliv, Inc. (NYSE:ALV) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Autoliv:
0.18 = US$773m ÷ (US$6.8b - US$2.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Autoliv has an ROCE of 18%.
Is Autoliv's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Autoliv's ROCE is around the 15% average reported by the Auto Components industry. Separate from Autoliv's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can see in the image below how Autoliv's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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.
How Autoliv'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Autoliv has total assets of US$6.8b and current liabilities of US$2.4b. As a result, its current liabilities are equal to approximately 36% of its total assets. Autoliv has a medium level of current liabilities, which would boost the ROCE.
Our Take On Autoliv's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Autoliv looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Autoliv better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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