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Today we are going to look at Andrews Sykes Group plc (LON:ASY) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.
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 Andrews Sykes Group:
0.33 = UK£21m ÷ (UK£79m - UK£16m) (Based on the trailing twelve months to December 2018.)
Therefore, Andrews Sykes Group has an ROCE of 33%.
Is Andrews Sykes Group's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Andrews Sykes Group's ROCE is meaningfully higher than the 14% average in the Trade Distributors 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. Setting aside the comparison to its industry for a moment, Andrews Sykes Group's ROCE in absolute terms currently looks quite high.
You can see in the image below how Andrews Sykes Group's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. You can check if Andrews Sykes Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Andrews Sykes Group's Current Liabilities And Their Impact On Its 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 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.
Andrews Sykes Group has total assets of UK£79m and current liabilities of UK£16m. As a result, its current liabilities are equal to approximately 20% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Andrews Sykes Group's ROCE
This is good to see, and with such a high ROCE, Andrews Sykes Group may be worth a closer look. Andrews Sykes Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Andrews Sykes Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.