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Do Ashtead Group plc’s (LON:AHT) Returns On Capital Employed Make The Cut?

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Today we are going to look at Ashtead Group plc (LON:AHT) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Ashtead Group:

0.15 = UK£993m ÷ (UK£8.3b – UK£853m) (Based on the trailing twelve months to October 2018.)

Therefore, Ashtead Group has an ROCE of 15%.

Check out our latest analysis for Ashtead Group

Is Ashtead Group’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Ashtead Group’s ROCE is fairly close to the Trade Distributors industry average of 15%. Separate from Ashtead Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

LSE:AHT Last Perf February 1st 19
LSE:AHT Last Perf February 1st 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ashtead Group.

Ashtead Group’s Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Ashtead Group has total assets of UK£8.3b and current liabilities of UK£853m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Ashtead Group’s ROCE

With that in mind, Ashtead Group’s ROCE appears pretty good. You might be able to find a better buy than Ashtead Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Ashtead 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 editorial-team@simplywallst.com.