Are AC Spólka Akcyjna’s (WSE:ACG) High Returns Really That Great?

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Today we'll look at AC Spólka Akcyjna (WSE:ACG) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?

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 AC Spólka Akcyjna:

0.39 = zł54m ÷ (zł181m - zł43m) (Based on the trailing twelve months to March 2019.)

So, AC Spólka Akcyjna has an ROCE of 39%.

View our latest analysis for AC Spólka Akcyjna

Is AC Spólka Akcyjna's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that AC Spólka Akcyjna's ROCE is meaningfully better than the 10% average in the Auto Components industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, AC Spólka Akcyjna's ROCE currently appears to be excellent.

In our analysis, AC Spólka Akcyjna's ROCE appears to be 39%, compared to 3 years ago, when its ROCE was 29%. This makes us think the business might be improving.

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, 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.

Do AC Spólka Akcyjna's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

AC Spólka Akcyjna has total liabilities of zł43m and total assets of zł181m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On AC Spólka Akcyjna's ROCE

With low current liabilities and a high ROCE, AC Spólka Akcyjna could be worthy of further investigation. AC Spólka Akcyjna 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.