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Returns On Capital At AdvanSix (NYSE:ASIX) Paint An Interesting Picture

Simply Wall St
·3 min read

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at AdvanSix (NYSE:ASIX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AdvanSix is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.054 = US$54m ÷ (US$1.3b - US$269m) (Based on the trailing twelve months to March 2020).

Therefore, AdvanSix has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.9%.

See our latest analysis for AdvanSix

roce
roce

In the above chart we have a measured AdvanSix's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AdvanSix here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at AdvanSix doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, AdvanSix has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From AdvanSix's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for AdvanSix have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 69% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, AdvanSix does come with some risks, and we've found 3 warning signs that you should be aware of.

While AdvanSix isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.