Why We’re Not Impressed By AMCON Distributing Company’s (NYSEMKT:DIT) 9.1% ROCE

Today we are going to look at AMCON Distributing Company (NYSEMKT:DIT) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 AMCON Distributing:

0.091 = US$8.6m ÷ (US$122m – US$27m) (Based on the trailing twelve months to December 2018.)

Therefore, AMCON Distributing has an ROCE of 9.1%.

Check out our latest analysis for AMCON Distributing

Is AMCON Distributing’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see AMCON Distributing’s ROCE is meaningfully below the Retail Distributors industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how AMCON Distributing stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

As we can see, AMCON Distributing currently has an ROCE of 9.1%, less than the 14% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

AMEX:DIT Past Revenue and Net Income, April 14th 2019
AMEX:DIT Past Revenue and Net Income, April 14th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. How cyclical is AMCON Distributing? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How AMCON Distributing’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 counteract this, we check if a company has high current liabilities, relative to its total assets.

AMCON Distributing has total assets of US$122m and current liabilities of US$27m. As a result, its current liabilities are equal to approximately 22% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From AMCON Distributing’s ROCE

That said, AMCON Distributing’s ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than AMCON Distributing. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like AMCON Distributing better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.