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Today we’ll look at APC Technology Group PLC (LON:APC) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to 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.
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. Ultimately, it is a useful but imperfect metric. 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’.
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 APC Technology Group:
0.16 = UK£1.4m ÷ (UK£16m – UK£8.1m) (Based on the trailing twelve months to February 2019.)
Therefore, APC Technology Group has an ROCE of 16%.
Is APC Technology Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, APC Technology Group’s ROCE is meaningfully higher than the 12% average in the Electronic 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. Regardless of where APC Technology Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
APC Technology Group delivered an ROCE of 16%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for APC Technology Group.
APC Technology Group’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. 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.
APC Technology Group has total liabilities of UK£8.1m and total assets of UK£16m. As a result, its current liabilities are equal to approximately 49% of its total assets. APC Technology Group has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On APC Technology Group’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. APC Technology Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.