Are ATC CARGO S.A.’s (WSE:ATA) High Returns Really That Great?

Today we'll evaluate ATC CARGO S.A. (WSE:ATA) to determine whether it could have potential as an investment idea. 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.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for ATC CARGO:

0.10 = zł2.8m ÷ (zł71m - zł44m) (Based on the trailing twelve months to September 2018.)

Therefore, ATC CARGO has an ROCE of 10%.

See our latest analysis for ATC CARGO

Is ATC CARGO's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, ATC CARGO's ROCE is meaningfully higher than the 5.8% average in the Shipping industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the industry comparison for now, ATC CARGO's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

ATC CARGO reported an ROCE of 10% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. The image below shows how ATC CARGO's ROCE compares to its industry.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 only a point-in-time measure. How cyclical is ATC CARGO? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How ATC CARGO's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.

ATC CARGO has total liabilities of zł44m and total assets of zł71m. Therefore its current liabilities are equivalent to approximately 61% of its total assets. With a high level of current liabilities, ATC CARGO will experience a boost to its ROCE.

What We Can Learn From ATC CARGO's ROCE

Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. You might be able to find a better investment than ATC CARGO. 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 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 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.