Today we are going to look at APC Technology Group PLC (LON:APC) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?
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 APC Technology Group:
0.14 = UK£1.1m ÷ (UK£16m - UK£8.2m) (Based on the trailing twelve months to August 2018.)
Therefore, APC Technology Group has an ROCE of 14%.
Is APC Technology Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see APC Technology Group's ROCE is around the 14% average reported by the Electronic industry. Regardless of where APC Technology Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
APC Technology Group reported an ROCE of 14% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do APC Technology Group's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
APC Technology Group has total liabilities of UK£8.2m and total assets of UK£16m. As a result, its current liabilities are equal to approximately 51% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
The Bottom Line On APC Technology Group's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. There might be better investments than APC Technology Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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