In This Article:
Today we are going to look at Core Laboratories N.V. (NYSE:CLB) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Core Laboratories:
0.15 = US$99m ÷ (US$782m - US$125m) (Based on the trailing twelve months to June 2019.)
So, Core Laboratories has an ROCE of 15%.
Check out our latest analysis for Core Laboratories
Is Core Laboratories's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Core Laboratories's ROCE is meaningfully better than the 9.8% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Core Laboratories sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Core Laboratories's current ROCE of 15% is lower than its ROCE in the past, which was 28%, 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 Core Laboratories's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Core Laboratories could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.