Why You Should Like AAK AB (publ.)’s (STO:AAK) ROCE

Today we'll look at AAK AB (publ.) (STO:AAK) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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 amount of pre-tax profits a company can generate from the capital employed 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 AAK AB (publ.):

0.13 = kr2.2b ÷ (kr24b - kr7.4b) (Based on the trailing twelve months to March 2020.)

So, AAK AB (publ.) has an ROCE of 13%.

View our latest analysis for AAK AB (publ.)

Is AAK AB (publ.)'s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that AAK AB (publ.)'s ROCE is meaningfully better than the 9.5% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from AAK AB (publ.)'s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how AAK AB (publ.)'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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for AAK AB (publ.).

What Are Current Liabilities, And How Do They Affect AAK AB (publ.)'s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

AAK AB (publ.) has total assets of kr24b and current liabilities of kr7.4b. As a result, its current liabilities are equal to approximately 31% of its total assets. AAK AB (publ.) has a medium level of current liabilities, which would boost the ROCE.

Our Take On AAK AB (publ.)'s ROCE

AAK AB (publ.)'s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than AAK AB (publ.) 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.

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 editorial-team@simplywallst.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.

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