Today we’ll evaluate Aquila SA (EPA:ALAQU) 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. Ultimately, it is a useful but imperfect metric. 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 Aquila:
0.39 = €882k ÷ (€8.1m – €5.9m) (Based on the trailing twelve months to December 2018.)
So, Aquila has an ROCE of 39%.
Does Aquila Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Aquila’s ROCE is meaningfully higher than the 7.7% average in the Commercial Services 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. Putting aside its position relative to its industry for now, in absolute terms, Aquila’s ROCE is currently very good.
Our data shows that Aquila currently has an ROCE of 39%, compared to its ROCE of 30% 3 years ago. This makes us think the business might be improving. You can see in the image below how Aquila’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. You can check if Aquila has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Aquila’s Current Liabilities Impact 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. 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.
Aquila has total assets of €8.1m and current liabilities of €5.9m. As a result, its current liabilities are equal to approximately 72% of its total assets. Aquila’s high level of current liabilities boost the ROCE – but its ROCE is still impressive.
Our Take On Aquila’s ROCE
In my book, this business could be worthy of further research. Aquila 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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.