Yahoo Finance Ferrexpo Plc (LON:FXPO) Earns Among The Best Returns In Its Industry
Today we'll look at Ferrexpo Plc (LON:FXPO) 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. 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 'return' (pre-tax profit) a company generates from 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 Ferrexpo:
0.39 = US$560m ÷ (US$1.7b - US$227m) (Based on the trailing twelve months to June 2019.)
Therefore, Ferrexpo has an ROCE of 39%.
View our latest analysis for Ferrexpo
Does Ferrexpo Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Ferrexpo's ROCE appears to be substantially greater than the 13% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Ferrexpo's ROCE in absolute terms currently looks quite high.
In our analysis, Ferrexpo's ROCE appears to be 39%, compared to 3 years ago, when its ROCE was 25%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Ferrexpo's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. We note Ferrexpo could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ferrexpo.
Ferrexpo's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Ferrexpo has total assets of US$1.7b and current liabilities of US$227m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On Ferrexpo's ROCE
With low current liabilities and a high ROCE, Ferrexpo could be worthy of further investigation. Ferrexpo shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
