Today we'll evaluate A3 Allmänna IT- och telekomaktiebolaget (publ) (STO:ATRE) 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. Second, we'll look at its ROCE compared 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 A3 Allmänna IT- och telekomaktiebolaget:
0.032 = kr6.9m ÷ (kr468m - kr255m) (Based on the trailing twelve months to September 2019.)
Therefore, A3 Allmänna IT- och telekomaktiebolaget has an ROCE of 3.2%.
View our latest analysis for A3 Allmänna IT- och telekomaktiebolaget
Is A3 Allmänna IT- och telekomaktiebolaget's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see A3 Allmänna IT- och telekomaktiebolaget's ROCE is meaningfully below the Telecom industry average of 5.4%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, A3 Allmänna IT- och telekomaktiebolaget's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
A3 Allmänna IT- och telekomaktiebolaget's current ROCE of 3.2% is lower than its ROCE in the past, which was 44%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how A3 Allmänna IT- och telekomaktiebolaget's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.