Yahoo Finance A Close Look At Otis Worldwide Corporation’s (NYSE:OTIS) 44% ROCE
Today we'll look at Otis Worldwide Corporation (NYSE:OTIS) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Otis Worldwide:
0.44 = US$1.9b ÷ (US$9.5b - US$5.4b) (Based on the trailing twelve months to March 2020.)
So, Otis Worldwide has an ROCE of 44%.
Check out our latest analysis for Otis Worldwide
Is Otis Worldwide's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Otis Worldwide's ROCE appears to be substantially greater than the 10.0% average in the Machinery 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. Setting aside the comparison to its industry for a moment, Otis Worldwide's ROCE in absolute terms currently looks quite high.
The image below shows how Otis Worldwide's ROCE compares to its industry, and you can click it to see more detail on its 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Otis Worldwide's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Otis Worldwide has current liabilities of US$5.4b and total assets of US$9.5b. As a result, its current liabilities are equal to approximately 56% of its total assets. Otis Worldwide boasts an attractive ROCE, even after considering the boost from high current liabilities.
The Bottom Line On Otis Worldwide's ROCE
So we would be interested in doing more research here -- there may be an opportunity! There might be better investments than Otis Worldwide out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
