Yahoo Finance Do You Know About Clipper Logistics plc’s (LON:CLG) ROCE?
Today we'll evaluate Clipper Logistics plc (LON:CLG) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of 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. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. 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.
So, How Do We Calculate ROCE?
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 Clipper Logistics:
0.09 = UK£22m ÷ (UK£411m - UK£167m) (Based on the trailing twelve months to October 2019.)
Therefore, Clipper Logistics has an ROCE of 9.0%.
View our latest analysis for Clipper Logistics
Is Clipper Logistics's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Clipper Logistics's ROCE is fairly close to the Commercial Services industry average of 10%. Regardless of where Clipper Logistics sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Clipper Logistics's current ROCE of 9.0% is lower than 3 years ago, when the company reported a 32% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Clipper Logistics'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. 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 Clipper Logistics.
What Are Current Liabilities, And How Do They Affect Clipper Logistics's 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 current liabilities of UK£167m and total assets of UK£411m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. Clipper Logistics has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Clipper Logistics's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Clipper Logistics 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.
I will like Clipper Logistics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
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