Today we’ll look at Aptitude Software Group plc (LON:APTD) 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. 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?
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 Aptitude Software Group:
0.18 = UK£14m ÷ (UK£117m – UK£39m) (Based on the trailing twelve months to December 2018.)
Therefore, Aptitude Software Group has an ROCE of 18%.
Is Aptitude Software Group’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Aptitude Software Group’s ROCE appears to be substantially greater than the 11% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Aptitude Software Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Aptitude Software Group currently has an ROCE of 18%, compared to its ROCE of 14% 3 years ago. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Aptitude Software Group.
What Are Current Liabilities, And How Do They Affect Aptitude Software Group’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Aptitude Software Group has total assets of UK£117m and current liabilities of UK£39m. As a result, its current liabilities are equal to approximately 34% of its total assets. Aptitude Software Group has a medium level of current liabilities, which would boost the ROCE.
Our Take On Aptitude Software Group’s ROCE
Aptitude Software Group’s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Aptitude Software Group 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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.