What Can We Make Of Clipper Logistics plc’s (LON:CLG) High Return On Capital?

Today we are going to look at Clipper Logistics plc (LON:CLG) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?

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 Clipper Logistics:

0.25 = UK£20m ÷ (UK£213m - UK£134m) (Based on the trailing twelve months to October 2018.)

Therefore, Clipper Logistics has an ROCE of 25%.

View our latest analysis for Clipper Logistics

Is Clipper Logistics's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Clipper Logistics's ROCE is meaningfully higher than the 11% average in the Commercial Services 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. Regardless of the industry comparison, in absolute terms, Clipper Logistics's ROCE currently appears to be excellent.

We can see that , Clipper Logistics currently has an ROCE of 25%, less than the 40% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Clipper Logistics's ROCE compares to its industry, and you can click it to see more detail on its past growth.

LSE:CLG Past Revenue and Net Income, July 25th 2019

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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Clipper Logistics's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Clipper Logistics has total assets of UK£213m and current liabilities of UK£134m. As a result, its current liabilities are equal to approximately 63% of its total assets. While a high level of current liabilities boosts its ROCE, Clipper Logistics's returns are still very good.

What We Can Learn From Clipper Logistics's ROCE

So we would be interested in doing more research here -- there may be an opportunity! Clipper Logistics 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.

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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.

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. Thank you for reading.