What Can We Learn From Alaska Communications Systems Group, Inc.’s (NASDAQ:ALSK) Investment Returns?

Today we are going to look at Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Alaska Communications Systems Group:

0.059 = US$24m ÷ (US$455m - US$47m) (Based on the trailing twelve months to December 2018.)

Therefore, Alaska Communications Systems Group has an ROCE of 5.9%.

See our latest analysis for Alaska Communications Systems Group

Does Alaska Communications Systems Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Alaska Communications Systems Group's ROCE is fairly close to the Telecom industry average of 7.0%. Separate from how Alaska Communications Systems Group 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.

Our data shows that Alaska Communications Systems Group currently has an ROCE of 5.9%, compared to its ROCE of 2.9% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

When considering this metric, keep in mind that it is backwards looking, and 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. If Alaska Communications Systems Group is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.

Alaska Communications Systems Group's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Alaska Communications Systems Group has total assets of US$455m and current liabilities of US$47m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Alaska Communications Systems Group's ROCE

That said, Alaska Communications Systems Group's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

I will like Alaska Communications Systems Group better if I see some big insider buys. While we wait, check out this freelist 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.