Today we'll look at AptarGroup, Inc. (NYSE:ATR) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
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 AptarGroup:
0.14 = US$399m ÷ (US$3.6b - US$671m) (Based on the trailing twelve months to June 2019.)
So, AptarGroup has an ROCE of 14%.
Is AptarGroup's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, AptarGroup's ROCE is meaningfully higher than the 9.8% average in the Packaging industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where AptarGroup sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how AptarGroup'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 AptarGroup's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
AptarGroup has total assets of US$3.6b and current liabilities of US$671m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On AptarGroup's ROCE
Overall, AptarGroup has a decent ROCE and could be worthy of further research. AptarGroup 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 AptarGroup 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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