Yahoo Finance Here’s What Inchcape plc’s (LON:INCH) ROCE Can Tell Us
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Today we’ll evaluate Inchcape plc (LON:INCH) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Inchcape:
0.20 = UK£409m ÷ (UK£5.1b – UK£3.2b) (Based on the trailing twelve months to June 2018.)
Therefore, Inchcape has an ROCE of 20%.
View our latest analysis for Inchcape
Does Inchcape Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Inchcape’s ROCE appears to be substantially greater than the 16% average in the Retail Distributors industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Inchcape’s ROCE is currently very good.
When considering this metric, keep in mind that it is backwards looking, and 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Inchcape.
What Are Current Liabilities, And How Do They Affect Inchcape’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Inchcape has total liabilities of UK£3.2b and total assets of UK£5.1b. Therefore its current liabilities are equivalent to approximately 62% of its total assets. While a high level of current liabilities boosts its ROCE, Inchcape’s returns are still very good.
The Bottom Line On Inchcape’s ROCE
So we would be interested in doing more research here — there may be an opportunity! Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
