# AAON, Inc. (NASDAQ:AAON) Is Employing Capital Very Effectively

Today we’ll look at AAON, Inc. (NASDAQ:AAON) and reflect on its potential as an investment. 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 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.

### Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 AAON:

0.26 = US\$85m ÷ (US\$396m – US\$64m) (Based on the trailing twelve months to March 2020.)

Therefore, AAON has an ROCE of 26%.

Check out our latest analysis for AAON

### Is AAON’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that AAON’s ROCE is meaningfully better than the 14% average in the Building industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, AAON’s ROCE currently appears to be excellent.

AAON’s current ROCE of 26% is lower than its ROCE in the past, which was 35%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how AAON’s ROCE compares to its industry, and you can click it to see more detail on its 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 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.

### Do AAON’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

AAON has current liabilities of US\$64m and total assets of US\$396m. As a result, its current liabilities are equal to approximately 16% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.

### What We Can Learn From AAON’s ROCE

This is good to see, and with such a high ROCE, AAON may be worth a closer look. AAON 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.