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Today we’ll evaluate Andrews Sykes Group plc (

LON:ASY

) to determine whether it could have potential as an investment idea. 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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’.

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 Andrews Sykes Group:

0.32 = UK£18m ÷ (UK£74m – UK£15m) (Based on the trailing twelve months to June 2018.)

So,

Andrews Sykes Group has an ROCE of 32%.

Check out our latest analysis for Andrews Sykes Group

Does Andrews Sykes Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Andrews Sykes Group’s ROCE is meaningfully higher than the 15% average in the Trade Distributors industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Andrews Sykes Group’s ROCE currently appears to be excellent.

AIM:ASY Last Perf February 1st 19

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, after all, simply a snap shot of a single year. You can check if Andrews Sykes Group has cyclical profits by looking at this

free

graph of past earnings, revenue and cash flow

.

Story continues

Andrews Sykes Group’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Andrews Sykes Group has total liabilities of UK£15m and total assets of UK£74m. As a result, its current liabilities are equal to approximately 20% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

What We Can Learn From Andrews Sykes Group’s ROCE

Low current liabilities and high ROCE is a good combination, making Andrews Sykes Group look quite interesting. Of course,

you might find a fantastic investment by looking at a few good candidates.

So take a peek at this

free

list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Andrews Sykes Group better if I see some big insider buys. While we wait, check out this

free

list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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