What Can We Learn From Aker Solutions ASA’s (OB:AKSO) Investment Returns?

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Today we'll look at Aker Solutions ASA (OB:AKSO) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Aker Solutions:

0.078 = øre1.2b ÷ (øre27b - øre12b) (Based on the trailing twelve months to March 2019.)

Therefore, Aker Solutions has an ROCE of 7.8%.

See our latest analysis for Aker Solutions

Is Aker Solutions's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Aker Solutions's ROCE is fairly close to the Energy Services industry average of 7.4%. Aside from the industry comparison, Aker Solutions's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Aker Solutions's current ROCE of 7.8% is lower than 3 years ago, when the company reported a 12% ROCE. So investors might consider if it has had issues recently.

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Aker Solutions could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Aker Solutions.

What Are Current Liabilities, And How Do They Affect Aker Solutions'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Aker Solutions has total liabilities of øre12b and total assets of øre27b. As a result, its current liabilities are equal to approximately 43% of its total assets. Aker Solutions has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Aker Solutions's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Aker Solutions. 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).

If you like to buy stocks alongside management, then you might just love this free list 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.