This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Alaska Communications Systems Group Inc (NASDAQ:ALSK).
Purchasing Alaska Communications Systems Group gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to ALSK’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Alaska Communications Systems Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
Choosing to invest in Alaska Communications Systems Group comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine Alaska Communications Systems Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:
ROCE Calculation for ALSK
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$11m ÷ (US$450m – US$50m) = 6.1%
ALSK’s 6.1% ROCE means that for every $100 you invest, the company creates $6.1. This makes Alaska Communications Systems Group unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.
What is causing this?
Alaska Communications Systems Group’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Alaska Communications Systems Group is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that ALSK’s ROCE has risen from 1.3%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from -US$8.9m to US$11m and the amount of capital employed has declined because of a decline in total assets , which is an indication that Alaska Communications Systems Group has increased the ROCE for investors by producing more earnings and using less capital.
Despite ALSK’s current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Alaska Communications Systems Group’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for ALSK’s future growth? Take a look at our free research report of analyst consensus for ALSK’s outlook.
- Valuation: What is ALSK worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ALSK is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.