Yahoo Finance Do You Know About Ultra Electronics Holdings plc’s (LON:ULE) ROCE?
Today we'll evaluate Ultra Electronics Holdings plc (LON:ULE) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. 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.
What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Ultra Electronics Holdings:
0.13 = UK£78m ÷ (UK£1.0b - UK£420m) (Based on the trailing twelve months to December 2018.)
Therefore, Ultra Electronics Holdings has an ROCE of 13%.
Check out our latest analysis for Ultra Electronics Holdings
Does Ultra Electronics Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Ultra Electronics Holdings's ROCE is around the 12% average reported by the Aerospace & Defense industry. Regardless of where Ultra Electronics Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Ultra Electronics Holdings currently has an ROCE of 13%, compared to its ROCE of 10% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Ultra Electronics Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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 Ultra Electronics Holdings.
Ultra Electronics Holdings'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Ultra Electronics Holdings has total liabilities of UK£420m and total assets of UK£1.0b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. Ultra Electronics Holdings has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Ultra Electronics Holdings's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Ultra Electronics Holdings 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
