Today we'll look at Apollo Tourism & Leisure Ltd (ASX:ATL) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. 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?
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 Apollo Tourism & Leisure:
0.12 = AU$35m ÷ (AU$585m - AU$300m) (Based on the trailing twelve months to June 2019.)
So, Apollo Tourism & Leisure has an ROCE of 12%.
Is Apollo Tourism & Leisure's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Apollo Tourism & Leisure's ROCE is meaningfully higher than the 8.9% average in the Auto industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Apollo Tourism & Leisure 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 Apollo Tourism & Leisure'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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Apollo Tourism & Leisure.
Do Apollo Tourism & Leisure's Current Liabilities Skew 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.
Apollo Tourism & Leisure has total liabilities of AU$300m and total assets of AU$585m. Therefore its current liabilities are equivalent to approximately 51% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
The Bottom Line On Apollo Tourism & Leisure's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Apollo Tourism & Leisure 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.