Should You Care About Academies Australasia Group Limited’s (ASX:AKG) Investment Potential?
Today we'll look at Academies Australasia Group Limited (ASX:AKG) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. 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.
Return On Capital Employed (ROCE): What is it?
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. 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.
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 Academies Australasia Group:
0.10 = AU$7.1m ÷ (AU$100m - AU$32m) (Based on the trailing twelve months to December 2019.)
So, Academies Australasia Group has an ROCE of 10%.
View our latest analysis for Academies Australasia Group
Is Academies Australasia Group's ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Academies Australasia Group's ROCE is fairly close to the Consumer Services industry average of 9.2%. Independently of how Academies Australasia Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Academies Australasia Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. You can check if Academies Australasia Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Academies Australasia Group's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Academies Australasia Group has current liabilities of AU$32m and total assets of AU$100m. As a result, its current liabilities are equal to approximately 32% of its total assets. Academies Australasia Group has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Academies Australasia Group's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Academies Australasia Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
Academies Australasia Group is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
