Why We’re Not Keen On AMAG Austria Metall AG’s (VIE:AMAG) 2.3% Return On Capital
Today we'll look at AMAG Austria Metall AG (VIE:AMAG) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
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 AMAG Austria Metall:
0.023 = €31m ÷ (€1.6b - €209m) (Based on the trailing twelve months to September 2019.)
So, AMAG Austria Metall has an ROCE of 2.3%.
See our latest analysis for AMAG Austria Metall
Is AMAG Austria Metall's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, AMAG Austria Metall's ROCE appears to be significantly below the 9.8% average in the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside AMAG Austria Metall's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
AMAG Austria Metall's current ROCE of 2.3% is lower than 3 years ago, when the company reported a 5.0% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how AMAG Austria Metall's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Remember that most companies like AMAG Austria Metall are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for AMAG Austria Metall.
Do AMAG Austria Metall'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
AMAG Austria Metall has current liabilities of €209m and total assets of €1.6b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
What We Can Learn From AMAG Austria Metall's ROCE
AMAG Austria Metall has a poor ROCE, and there may be better investment prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like AMAG Austria Metall 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.
