Yahoo Finance Examining Alpha Financial Markets Consulting plc’s (LON:AFM) Weak Return On Capital Employed
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Today we'll look at Alpha Financial Markets Consulting plc (LON:AFM) 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.
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. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.'
How Do You Calculate Return On Capital Employed?
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 Alpha Financial Markets Consulting:
0.13 = UK£11m ÷ (UK£109m - UK£21m) (Based on the trailing twelve months to September 2018.)
So, Alpha Financial Markets Consulting has an ROCE of 13%.
See our latest analysis for Alpha Financial Markets Consulting
Is Alpha Financial Markets Consulting's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Alpha Financial Markets Consulting's ROCE is meaningfully below the Professional Services industry average of 18%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of where Alpha Financial Markets Consulting sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Alpha Financial Markets Consulting's current ROCE of 13% is lower than 3 years ago, when the company reported a 17% ROCE. This makes us wonder if the business is facing new challenges.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Alpha Financial Markets Consulting's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Alpha Financial Markets Consulting has total assets of UK£109m and current liabilities of UK£21m. As a result, its current liabilities are equal to approximately 19% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Alpha Financial Markets Consulting's ROCE
This is good to see, and with a sound ROCE, Alpha Financial Markets Consulting could be worth a closer look. Alpha Financial Markets Consulting 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.
I will like Alpha Financial Markets Consulting better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. Thank you for reading.
