Yahoo Finance A Close Look At Arcontech Group plc’s (LON:ARC) 21% ROCE
Today we'll look at Arcontech Group plc (LON:ARC) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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.
How Do You Calculate Return On Capital Employed?
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 Arcontech Group:
0.21 = UK£1.1m ÷ (UK£7.8m - UK£2.4m) (Based on the trailing twelve months to December 2019.)
Therefore, Arcontech Group has an ROCE of 21%.
View our latest analysis for Arcontech Group
Does Arcontech Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Arcontech Group's ROCE is meaningfully better than the 9.5% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Arcontech Group's ROCE is currently very good.
Our data shows that Arcontech Group currently has an ROCE of 21%, compared to its ROCE of 12% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Arcontech Group's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Arcontech Group.
Do Arcontech 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. 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.
Arcontech Group has current liabilities of UK£2.4m and total assets of UK£7.8m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Arcontech Group has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From Arcontech Group's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Arcontech Group 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
