Today we are going to look at Party City Holdco Inc. (NYSE:PRTY) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we’ll work out how to 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.
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. 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?
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 Party City Holdco:
0.11 = US$289m ÷ (US$3.7b – US$863m) (Based on the trailing twelve months to September 2018.)
So, Party City Holdco has an ROCE of 11%.
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Is Party City Holdco’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Party City Holdco’s ROCE is fairly close to the Specialty Retail industry average of 13%. Aside from the industry comparison, Party City Holdco’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Party City Holdco.
How Party City Holdco’s Current Liabilities Impact Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Party City Holdco has total liabilities of US$863m and total assets of US$3.7b. As a result, its current liabilities are equal to approximately 23% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Party City Holdco’s ROCE
If Party City Holdco continues to earn an uninspiring ROCE, there may be better places to invest. Of course you might be able to find a better stock than Party City Holdco. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 email@example.com.