Yahoo Finance Is Intertek Group plc (LON:ITRK) Investing Effectively In Its Business?
Today we are going to look at Intertek Group plc (LON:ITRK) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Ultimately, it is a useful but imperfect metric. 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?
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 Intertek Group:
0.22 = UK£476m ÷ (UK£2.9b - UK£737m) (Based on the trailing twelve months to June 2019.)
Therefore, Intertek Group has an ROCE of 22%.
See our latest analysis for Intertek Group
Is Intertek Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Intertek Group's ROCE appears to be around the 19% average of the Professional Services industry. Putting aside its position relative to its industry for now, in absolute terms, Intertek Group's ROCE is currently very good.
You can see in the image below how Intertek Group'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Intertek Group.
What Are Current Liabilities, And How Do They Affect Intertek Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Intertek Group has total liabilities of UK£737m and total assets of UK£2.9b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Intertek Group's ROCE
With low current liabilities and a high ROCE, Intertek Group could be worthy of further investigation. Intertek Group 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.
I will like Intertek Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
