In This Article:
Today we'll evaluate AQ Group AB (publ) (STO:AQ) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 AQ Group:
0.11 = kr299m ÷ (kr4.0b - kr1.3b) (Based on the trailing twelve months to September 2019.)
Therefore, AQ Group has an ROCE of 11%.
Check out our latest analysis for AQ Group
Is AQ Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that AQ Group's ROCE is meaningfully better than the 8.2% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where AQ Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
AQ Group's current ROCE of 11% is lower than its ROCE in the past, which was 16%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how AQ Group's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. You can check if AQ Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.