Why A3 Allmänna IT- och telekomaktiebolaget (publ)’s (STO:ATRE) Use Of Investor Capital Doesn’t Look Great

Today we'll evaluate A3 Allmänna IT- och telekomaktiebolaget (publ) (STO:ATRE) 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.

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. 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 measures the amount of pre-tax profits a company can generate from the 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. 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:

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

Or for A3 Allmänna IT- och telekomaktiebolaget:

0.032 = kr6.9m ÷ (kr468m - kr255m) (Based on the trailing twelve months to September 2019.)

Therefore, A3 Allmänna IT- och telekomaktiebolaget has an ROCE of 3.2%.

View our latest analysis for A3 Allmänna IT- och telekomaktiebolaget

Is A3 Allmänna IT- och telekomaktiebolaget's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see A3 Allmänna IT- och telekomaktiebolaget's ROCE is meaningfully below the Telecom industry average of 5.4%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, A3 Allmänna IT- och telekomaktiebolaget'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.

A3 Allmänna IT- och telekomaktiebolaget's current ROCE of 3.2% is lower than its ROCE in the past, which was 44%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how A3 Allmänna IT- och telekomaktiebolaget's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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.

How A3 Allmänna IT- och telekomaktiebolaget's Current Liabilities Impact 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. 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.

A3 Allmänna IT- och telekomaktiebolaget has total liabilities of kr255m and total assets of kr468m. Therefore its current liabilities are equivalent to approximately 54% of its total assets. A3 Allmänna IT- och telekomaktiebolaget has a fairly high level of current liabilities, meaningfully impacting its ROCE.

What We Can Learn From A3 Allmänna IT- och telekomaktiebolaget's ROCE

Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. Of course, you might also be able to find a better stock than A3 Allmänna IT- och telekomaktiebolaget. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like A3 Allmänna IT- och telekomaktiebolaget better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.