Why AMCON Distributing Company’s (NYSEMKT:DIT) Return On Capital Employed Looks Uninspiring

Today we'll look at AMCON Distributing Company (NYSEMKT:DIT) 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 up, we'll look at what ROCE is and how we calculate it. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.

How Do You Calculate Return On Capital Employed?

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 AMCON Distributing:

0.057 = US$7.2m ÷ (US$164m - US$39m) (Based on the trailing twelve months to March 2020.)

So, AMCON Distributing has an ROCE of 5.7%.

See our latest analysis for AMCON Distributing

Is AMCON Distributing's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, AMCON Distributing's ROCE appears meaningfully below the 12% average reported by the Retail Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how AMCON Distributing stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

We can see that, AMCON Distributing currently has an ROCE of 5.7%, less than the 12% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how AMCON Distributing's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. How cyclical is AMCON Distributing? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

AMCON Distributing's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

AMCON Distributing has current liabilities of US$39m and total assets of US$164m. As a result, its current liabilities are equal to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On AMCON Distributing's ROCE

With that in mind, we're not overly impressed with AMCON Distributing's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than AMCON Distributing. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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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.