Why Alaska Communications Systems Group, Inc.’s (NASDAQ:ALSK) Return On Capital Employed Looks Uninspiring

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Today we are going to look at Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. 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.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Alaska Communications Systems Group:

0.05 = US$25m ÷ (US$542m – US$49m) (Based on the trailing twelve months to March 2019.)

So, Alaska Communications Systems Group has an ROCE of 5.0%.

See our latest analysis for Alaska Communications Systems Group

Does Alaska Communications Systems Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Alaska Communications Systems Group’s ROCE appears to be significantly below the 6.5% average in the Telecom industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Alaska Communications Systems Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

Our data shows that Alaska Communications Systems Group currently has an ROCE of 5.0%, compared to its ROCE of 3.7% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

NasdaqGS:ALSK Past Revenue and Net Income, July 16th 2019
NasdaqGS:ALSK Past Revenue and Net Income, July 16th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Alaska Communications Systems Group has cyclical profits by looking at this free graph 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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Alaska Communications Systems Group has total liabilities of US$49m and total assets of US$542m. Therefore its current liabilities are equivalent to approximately 9.1% of its total assets. With barely any current liabilities, there is minimal impact on Alaska Communications Systems Group’s admittedly low ROCE.

The Bottom Line On Alaska Communications Systems Group’s ROCE

Still, investors could probably find more attractive prospects with better performance out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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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.