Yahoo Finance Evaluating AB Dynamics plc’s (LON:ABDP) Investments In Its Business
Today we'll look at AB Dynamics plc (LON:ABDP) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for AB Dynamics:
0.11 = UK£12m ÷ (UK£124m - UK£17m) (Based on the trailing twelve months to August 2019.)
Therefore, AB Dynamics has an ROCE of 11%.
View our latest analysis for AB Dynamics
Does AB Dynamics Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, AB Dynamics's ROCE appears to be around the 9.9% average of the Auto Components industry. Independently of how AB Dynamics compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
AB Dynamics's current ROCE of 11% is lower than its ROCE in the past, which was 26%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how AB Dynamics's ROCE compares to its industry. Click to see more on past growth.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How AB Dynamics's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
AB Dynamics has total assets of UK£124m and current liabilities of UK£17m. As a result, its current liabilities are equal to approximately 14% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On AB Dynamics's ROCE
This is good to see, and with a sound ROCE, AB Dynamics could be worth a closer look. There might be better investments than AB Dynamics 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.
I will like AB Dynamics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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