In This Article:
Today we are going to look at ASOS Plc (LON:ASC) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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. 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 ASOS:
0.16 = UK£77m ÷ (UK£1.1b - UK£651m) (Based on the trailing twelve months to February 2019.)
So, ASOS has an ROCE of 16%.
See our latest analysis for ASOS
Does ASOS Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that ASOS's ROCE is fairly close to the Online Retail industry average of 19%. Independently of how ASOS compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
ASOS's current ROCE of 16% is lower than 3 years ago, when the company reported a 27% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how ASOS's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. 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 ASOS.
How ASOS's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.