Yahoo Finance Why We Like Verisk Analytics, Inc.’s (NASDAQ:VRSK) 18% Return On Capital Employed
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Today we are going to look at Verisk Analytics, Inc. (NASDAQ:VRSK) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
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 Verisk Analytics:
0.18 = US$836m ÷ (US$5.9b - US$1.3b) (Based on the trailing twelve months to December 2018.)
Therefore, Verisk Analytics has an ROCE of 18%.
Check out our latest analysis for Verisk Analytics
Does Verisk Analytics Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Verisk Analytics's ROCE appears to be substantially greater than the 12% average in the Professional Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Verisk Analytics's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Verisk Analytics.
What Are Current Liabilities, And How Do They Affect Verisk Analytics'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Verisk Analytics has total liabilities of US$1.3b and total assets of US$5.9b. As a result, its current liabilities are equal to approximately 22% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From Verisk Analytics's ROCE
With that in mind, Verisk Analytics's ROCE appears pretty good. You might be able to find a better buy than Verisk Analytics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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.