Yahoo Finance Are Alimentation Couche-Tard Inc.’s (TSE:ATD.B) High Returns Really That Great?
Today we'll look at Alimentation Couche-Tard Inc. (TSE:ATD.B) and reflect on its potential as an investment. 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.
Firstly, 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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'.
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 Alimentation Couche-Tard:
0.13 = US$2.7b ÷ (US$25b - US$4.4b) (Based on the trailing twelve months to February 2020.)
So, Alimentation Couche-Tard has an ROCE of 13%.
See our latest analysis for Alimentation Couche-Tard
Does Alimentation Couche-Tard Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Alimentation Couche-Tard's ROCE appears to be substantially greater than the 9.2% average in the Consumer Retailing industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Alimentation Couche-Tard 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 Alimentation Couche-Tard's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Alimentation Couche-Tard.
Alimentation Couche-Tard's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Alimentation Couche-Tard has current liabilities of US$4.4b and total assets of US$25b. As a result, its current liabilities are equal to approximately 18% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Alimentation Couche-Tard's ROCE
Overall, Alimentation Couche-Tard has a decent ROCE and could be worthy of further research. Alimentation Couche-Tard shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
Alimentation Couche-Tard is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
