Today we’ll evaluate Allied Motion Technologies Inc. (NASDAQ:AMOT) 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.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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?
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 Allied Motion Technologies:
0.11 = US$28m ÷ (US$308m – US$48m) (Based on the trailing twelve months to September 2019.)
Therefore, Allied Motion Technologies has an ROCE of 11%.
Is Allied Motion Technologies’s ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Allied Motion Technologies’s ROCE is fairly close to the Electrical industry average of 10%. Independently of how Allied Motion Technologies compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Allied Motion Technologies’s current ROCE of 11% is lower than its ROCE in the past, which was 14%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Allied Motion Technologies’s past growth compares to other companies.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Allied Motion Technologies.
What Are Current Liabilities, And How Do They Affect Allied Motion Technologies’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Allied Motion Technologies has total assets of US$308m and current liabilities of US$48m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Allied Motion Technologies’s ROCE
With that in mind, Allied Motion Technologies’s ROCE appears pretty good. There might be better investments than Allied Motion Technologies out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.