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Here’s What ALS Limited’s (ASX:ALQ) Return On Capital Can Tell Us

Today we'll look at ALS Limited (ASX:ALQ) and reflect on its potential as an investment. 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. 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. Generally speaking a higher ROCE is better. 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?

Analysts use this formula to calculate return on capital employed:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for ALS:

0.17 = AU$277m ÷ (AU$2.2b - AU$541m) (Based on the trailing twelve months to March 2019.)

So, ALS has an ROCE of 17%.

See our latest analysis for ALS

Does ALS Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that ALS's ROCE is fairly close to the Professional Services industry average of 19%. Regardless of where ALS sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that , ALS currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 8.8%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how ALS's past growth compares to other companies.

ASX:ALQ Past Revenue and Net Income, August 9th 2019
ASX:ALQ Past Revenue and Net Income, August 9th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ALS.

How ALS'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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

ALS has total assets of AU$2.2b and current liabilities of AU$541m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On ALS's ROCE

Overall, ALS has a decent ROCE and could be worthy of further research. ALS looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.