Advertisement
Canada markets closed
  • S&P/TSX

    22,167.03
    +59.95 (+0.27%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CAD/USD

    0.7381
    -0.0005 (-0.07%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • Bitcoin CAD

    94,816.53
    -598.74 (-0.63%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • RUSSELL 2000

    2,124.55
    +10.20 (+0.48%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • NASDAQ

    16,379.46
    -20.06 (-0.12%)
     
  • VOLATILITY

    13.01
    0.00 (0.00%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • CAD/EUR

    0.6839
    -0.0004 (-0.06%)
     

Why Astronics Corporation’s (NASDAQ:ATRO) Use Of Investor Capital Doesn’t Look Great

Today we'll evaluate Astronics Corporation (NASDAQ:ATRO) 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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:

ADVERTISEMENT

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Astronics:

0.088 = US$58m ÷ (US$778m - US$119m) (Based on the trailing twelve months to September 2019.)

So, Astronics has an ROCE of 8.8%.

See our latest analysis for Astronics

Does Astronics Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Astronics's ROCE appears meaningfully below the 11% average reported by the Aerospace & Defense industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Astronics'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.

Astronics's current ROCE of 8.8% is lower than its ROCE in the past, which was 14%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Astronics's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:ATRO Past Revenue and Net Income, February 18th 2020
NasdaqGS:ATRO Past Revenue and Net Income, February 18th 2020

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. 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.

Astronics's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Astronics has total assets of US$778m and current liabilities of US$119m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Astronics's ROCE

With that in mind, we're not overly impressed with Astronics's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than Astronics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.