Yahoo Finance Here’s What PZ Cussons Plc’s (LON:PZC) Return On Capital Can Tell Us
Today we'll look at PZ Cussons Plc (LON:PZC) and reflect on its potential as an investment. 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 PZ Cussons:
0.10 = UK£78m ÷ (UK£947m - UK£208m) (Based on the trailing twelve months to May 2019.)
So, PZ Cussons has an ROCE of 10%.
View our latest analysis for PZ Cussons
Is PZ Cussons's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, PZ Cussons's ROCE appears to be around the 12% average of the Household Products industry. Independently of how PZ Cussons compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
PZ Cussons's current ROCE of 10% is lower than its ROCE in the past, which was 17%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how PZ Cussons's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How PZ Cussons's Current Liabilities Impact Its 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
PZ Cussons has total assets of UK£947m and current liabilities of UK£208m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On PZ Cussons's ROCE
Overall, PZ Cussons has a decent ROCE and could be worthy of further research. There might be better investments than PZ Cussons 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
