Is Allied Motion Technologies Inc.’s (NASDAQ:AMOT) 9.3% Return On Capital Employed Good News?

Today we are going to look at Allied Motion Technologies Inc. (NASDAQ:AMOT) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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.'

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 Allied Motion Technologies:

0.093 = US$25m ÷ (US$312m - US$45m) (Based on the trailing twelve months to March 2019.)

So, Allied Motion Technologies has an ROCE of 9.3%.

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Is Allied Motion Technologies's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Allied Motion Technologies's ROCE appears to be around the 10% average of the Electrical industry. Setting aside the industry comparison for now, Allied Motion Technologies's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Allied Motion Technologies's current ROCE of 9.3% is lower than 3 years ago, when the company reported a 15% 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. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Allied Motion Technologies.

How Allied Motion Technologies'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Allied Motion Technologies has total liabilities of US$45m and total assets of US$312m. As a result, its current liabilities are equal to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Allied Motion Technologies's ROCE

If Allied Motion Technologies continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Allied Motion Technologies. 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).

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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.