Yahoo Finance How Good Is Ashtead Group plc (LON:AHT) At Creating Shareholder Value?
Today we'll evaluate Ashtead Group plc (LON:AHT) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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.
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 Ashtead Group:
0.14 = UK£1.3b ÷ (UK£10b - UK£957m) (Based on the trailing twelve months to July 2019.)
So, Ashtead Group has an ROCE of 14%.
View 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 13%. Independently of how Ashtead Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Ashtead 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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Ashtead Group's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Ashtead Group has total assets of UK£10b and current liabilities of UK£957m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Low current liabilities have only a minimal impact on Ashtead Group's ROCE, making its decent returns more credible.
The Bottom Line On Ashtead Group's ROCE
This is good to see, and while better prospects may exist, Ashtead Group seems worth researching further. Ashtead 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.
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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.
