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Today, we will evaluate the advanced metallurgy group AMG N.V. (AMS: AMG) to determine if it could present potential as an investment idea.
Specifically, we will calculate its return on capital employed (ROCE) in the hope of gaining insight into the sector.
First, we will study how to calculate ROCE.
Then we will compare it to others in his sector.
Finally, we will examine the impact of its current liabilities on its ROCE.
Return on Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits that a company can generate from the capital used in its business.
In general, a higher ROCE is preferable.
Overall, it's a valuable metric that has its flaws.
Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".
So, how do we calculate ROCE?
The formula for calculating the return on capital employed is as follows:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)
Or for the AMG Advanced Metallurgical Group:
0.19 = 172 million USD (1.3 billion USD – 421 million USD) (based on the twelve months preceding December 2018.)
So, The AMG Advanced Metallurgical Group has a ROCE of 19%.
See our latest badysis for AMG Advanced Metallurgical Group
Does the advanced metallurgical group AMG have a good ROCE?
One way to evaluate ROCE is to compare similar businesses.
In our badysis, the ROCE of the AMG Advanced Metallurgical Group is well above the 10% average observed in the metals and mining sector.
We consider this to be positive because it suggests that it uses capital more efficiently than other similar companies.
Leaving aside the comparison with its business sector, the absolute ROCE of the AMG Advanced Metallurgical Group currently seems quite high.
As can be seen, the AMG Advanced Metallurgical Group currently has a ROCE of 19% compared to its ROCE three years ago, which was 7.8%.
This leads us to wonder whether the company has reinvested wisely.
When considering ROCE, keep in mind that it reflects the past and does not necessarily provide for the future.
Businesses in cyclical industries may be difficult to understand with ROCE, as returns generally appear high in times of economic boom and low during a recession.
ROCE is only a one-off measure.
Do not forget that most companies like AMG Advanced Metallurgical Group are cyclical activities.
Since the future is so important for investors, you should consult our free badyst forecast report for AMG Advanced Metallurgical Group.
Current liabilities of the AMG Advanced Metallurgical Group and its impact on ROCE
Current liabilities include bills, such as vendor payments, short-term debt or a tax bill, which must be paid within 12 months.
The ROCE equation subtracts the short-term liabilities of the capital used, so that a company with a lot of short-term liabilities appears to have less capital employed and a higher ROCE than it has. the case.
To remedy this, investors can check whether a company has high current liabilities relative to total badets.
The AMG Advanced Metallurgical Group has total liabilities of $ 421 million and total badets of $ 1.3 billion.
As a result, its current liabilities are equivalent to approximately 32% of its total badets.
The AMG Advanced Metallurgical Group has an average level of short-term liabilities, strengthening somewhat its ROCE.
The ROCE balance sheet of the AMG Advanced Metallurgical Group
Despite this, it points to a high ROCE and may warrant further investigation.
You may be able to find a better buy than the AMG Advanced Metallurgical Group. If you want a selection of possible winners, look at this free list of interesting companies that trade on a P / E below 20 (but have proven that they can increase their profits).
If you like to buy shares alongside management, you may love this free list of companies. (Hint: insiders bought them)
Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.
If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.
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