In This Article:
Today we'll evaluate Commercial Metals Company (NYSE:CMC) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Commercial Metals:
0.10 = US$318m ÷ (US$3.8b - US$704m) (Based on the trailing twelve months to May 2019.)
Therefore, Commercial Metals has an ROCE of 10%.
See our latest analysis for Commercial Metals
Is Commercial Metals's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Commercial Metals's ROCE is fairly close to the Metals and Mining industry average of 8.9%. Separate from how Commercial Metals stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Our data shows that Commercial Metals currently has an ROCE of 10%, compared to its ROCE of 7.8% 3 years ago. This makes us wonder if the company is improving. The image below shows how Commercial Metals's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Commercial Metals 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.