Today we'll evaluate Alimentation Couche-Tard Inc. (TSE:ATD.B) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Alimentation Couche-Tard:
0.14 = US$2.6b ÷ (US$25b - US$5.9b) (Based on the trailing twelve months to July 2019.)
So, Alimentation Couche-Tard has an ROCE of 14%.
Does Alimentation Couche-Tard Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Alimentation Couche-Tard's ROCE is meaningfully better than the 8.1% average in the Consumer Retailing 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 Alimentation Couche-Tard 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 Alimentation Couche-Tard'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 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 Alimentation Couche-Tard's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Alimentation Couche-Tard has total liabilities of US$5.9b and total assets of US$25b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Alimentation Couche-Tard's ROCE
Overall, Alimentation Couche-Tard has a decent ROCE and could be worthy of further research. There might be better investments than Alimentation Couche-Tard 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.
I will like Alimentation Couche-Tard 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.