In This Article:
Today we are going to look at AZZ Inc. (NYSE:AZZ) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 AZZ:
0.086 = US$86m ÷ (US$1.1b - US$139m) (Based on the trailing twelve months to May 2019.)
Therefore, AZZ has an ROCE of 8.6%.
See our latest analysis for AZZ
Is AZZ's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, AZZ's ROCE appears meaningfully below the 11% average reported by the Electrical industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how AZZ stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
AZZ's current ROCE of 8.6% is lower than its ROCE in the past, which was 15%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how AZZ's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for AZZ.