A Close Look At A-Sonic Aerospace Limited’s (SGX:BTJ) 4.1% ROCE

Today we'll look at A-Sonic Aerospace Limited (SGX:BTJ) 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.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 A-Sonic Aerospace:

0.041 = US$1.1m ÷ (US$66m - US$40m) (Based on the trailing twelve months to September 2019.)

So, A-Sonic Aerospace has an ROCE of 4.1%.

Check out our latest analysis for A-Sonic Aerospace

Does A-Sonic Aerospace Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, A-Sonic Aerospace's ROCE is meaningfully higher than the 2.0% average in the Logistics industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside A-Sonic Aerospace's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

A-Sonic Aerospace has an ROCE of 4.1%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how A-Sonic Aerospace's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is A-Sonic Aerospace? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect A-Sonic Aerospace's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

A-Sonic Aerospace has total assets of US$66m and current liabilities of US$40m. As a result, its current liabilities are equal to approximately 60% of its total assets. Current liabilities of this level result in a meaningful boost to A-Sonic Aerospace's ROCE.

What We Can Learn From A-Sonic Aerospace's ROCE

, 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).

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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.

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