Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll evaluate accesso Technology Group plc (LON:ACSO) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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.’
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 accesso Technology Group:
0.036 = US$7.3m ÷ (US$249m – US$27m) (Based on the trailing twelve months to June 2018.)
So, accesso Technology Group has an ROCE of 3.6%.
Is accesso Technology Group’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, accesso Technology Group’s ROCE appears to be significantly below the 14% average in the Electronic industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how accesso Technology Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
As we can see, accesso Technology Group currently has an ROCE of 3.6%, less than the 5.9% it reported 3 years ago. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for accesso Technology Group.
What Are Current Liabilities, And How Do They Affect accesso Technology Group’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
accesso Technology Group has total assets of US$249m and current liabilities of US$27m. As a result, its current liabilities are equal to approximately 11% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
What We Can Learn From accesso Technology Group’s ROCE
While that is good to see, accesso Technology Group has a low ROCE and does not look attractive in this analysis. You might be able to find a better buy than accesso Technology Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.