Yahoo Finance What Does Apollo Tourism & Leisure Ltd’s (ASX:ATL) 9.4% ROCE Say About The Business?
Today we'll look at Apollo Tourism & Leisure Ltd (ASX:ATL) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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 Apollo Tourism & Leisure:
0.094 = AU$31m ÷ (AU$582m - AU$254m) (Based on the trailing twelve months to December 2019.)
Therefore, Apollo Tourism & Leisure has an ROCE of 9.4%.
View our latest analysis for Apollo Tourism & Leisure
Is Apollo Tourism & Leisure's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Apollo Tourism & Leisure's ROCE is fairly close to the Auto industry average of 8.3%. Separate from Apollo Tourism & Leisure's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how Apollo Tourism & Leisure's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Apollo Tourism & Leisure's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Apollo Tourism & Leisure has current liabilities of AU$254m and total assets of AU$582m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. With this level of current liabilities, Apollo Tourism & Leisure's ROCE is boosted somewhat.
The Bottom Line On Apollo Tourism & Leisure's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Apollo Tourism & Leisure 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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. Thank you for reading.
