Should You Like AMG Advanced Metallurgical Group N.V.’s (AMS:AMG) High Return On Capital Employed?

Today we'll evaluate AMG Advanced Metallurgical Group N.V. (AMS:AMG) 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 of all, we'll work out how to calculate ROCE. 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 AMG Advanced Metallurgical Group:

0.19 = US$172m ÷ (US$1.3b - US$421m) (Based on the trailing twelve months to December 2018.)

Therefore, AMG Advanced Metallurgical Group has an ROCE of 19%.

View our latest analysis for AMG Advanced Metallurgical Group

Does AMG Advanced Metallurgical Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, AMG Advanced Metallurgical Group's ROCE is meaningfully higher than the 10% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, AMG Advanced Metallurgical Group's ROCE in absolute terms currently looks quite high.

As we can see, AMG Advanced Metallurgical Group currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 7.8%. This makes us think about whether the company has been reinvesting shrewdly.

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. Remember that most companies like AMG Advanced Metallurgical Group are cyclical businesses. Since the future is so important for investors, you should check out our freereport on analyst forecasts for AMG Advanced Metallurgical Group.

AMG Advanced Metallurgical Group's Current Liabilities And Their Impact On Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

AMG Advanced Metallurgical Group has total liabilities of US$421m and total assets of US$1.3b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. AMG Advanced Metallurgical Group has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On AMG Advanced Metallurgical Group's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. You might be able to find a better buy than AMG Advanced Metallurgical Group. If you want a selection of possible winners, check out this freelist of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).

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 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. Thank you for reading.