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Today we'll look at AKWEL (EPA:AKW) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.
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 AKWEL:
0.14 = €77m ÷ (€807m - €251m) (Based on the trailing twelve months to December 2018.)
Therefore, AKWEL has an ROCE of 14%.
View our latest analysis for AKWEL
Does AKWEL Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, AKWEL's ROCE appears to be around the 13% average of the Auto Components industry. Separate from AKWEL's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
AKWEL's current ROCE of 14% is lower than its ROCE in the past, which was 20%, 3 years ago. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for AKWEL.
What Are Current Liabilities, And How Do They Affect AKWEL's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.