Today we’ll look at Artesian Resources Corporation (NASDAQ:ARTN.A) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. 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 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. 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 Artesian Resources:
0.048 = US$24m ÷ (US$539m – US$44m) (Based on the trailing twelve months to June 2019.)
Therefore, Artesian Resources has an ROCE of 4.8%.
Does Artesian Resources Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Artesian Resources’s ROCE is fairly close to the Water Utilities industry average of 4.4%. Independently of how Artesian Resources compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. If Artesian Resources is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Artesian Resources’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Artesian Resources has total liabilities of US$44m and total assets of US$539m. As a result, its current liabilities are equal to approximately 8.1% of its total assets. With barely any current liabilities, there is minimal impact on Artesian Resources’s admittedly low ROCE.
The Bottom Line On Artesian Resources’s ROCE
Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Artesian Resources. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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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.