Today we'll evaluate Asiakastieto Group Oyj (HEL:ATG1V) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 Asiakastieto Group Oyj:
0.052 = €26m ÷ (€562m - €55m) (Based on the trailing twelve months to March 2019.)
Therefore, Asiakastieto Group Oyj has an ROCE of 5.2%.
Does Asiakastieto Group Oyj Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Asiakastieto Group Oyj's ROCE appears to be significantly below the 11% average in the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Asiakastieto Group Oyj's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Asiakastieto Group Oyj's current ROCE of 5.2% is lower than 3 years ago, when the company reported a 14% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Asiakastieto Group Oyj'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. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Asiakastieto Group Oyj'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Asiakastieto Group Oyj has total liabilities of €55m and total assets of €562m. As a result, its current liabilities are equal to approximately 9.8% of its total assets. Asiakastieto Group Oyj reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On Asiakastieto Group Oyj's ROCE
If performance improves, then Asiakastieto Group Oyj may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Asiakastieto Group Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.