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Why We’re Not Keen On ASTM S.p.A.’s (BIT:AT) 7.1% Return On Capital

·4 min read

Today we are going to look at ASTM S.p.A. (BIT:AT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. 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. Generally speaking a higher ROCE is better. 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?

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 ASTM:

0.071 = €418m ÷ (€7.2b - €1.4b) (Based on the trailing twelve months to June 2019.)

So, ASTM has an ROCE of 7.1%.

Check out our latest analysis for ASTM

Is ASTM's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, ASTM's ROCE appears to be significantly below the 9.1% average in the Infrastructure industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, ASTM's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

The image below shows how ASTM's ROCE compares to its industry, and you can click it to see more detail on its past growth.

BIT:AT Past Revenue and Net Income, January 30th 2020
BIT:AT Past Revenue and Net Income, January 30th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for ASTM.

What Are Current Liabilities, And How Do They Affect ASTM's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

ASTM has current liabilities of €1.4b and total assets of €7.2b. As a result, its current liabilities are equal to approximately 19% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From ASTM's ROCE

That said, ASTM's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like ASTM better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.