In This Article:
Today we are going to look at Compass Minerals International, Inc. (NYSE:CMP) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, 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. 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.
How Do You Calculate Return On Capital Employed?
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 Compass Minerals International:
0.07 = US$143m ÷ (US$2.3b - US$278m) (Based on the trailing twelve months to September 2019.)
Therefore, Compass Minerals International has an ROCE of 7.0%.
View our latest analysis for Compass Minerals International
Is Compass Minerals International's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Compass Minerals International's ROCE appears to be significantly below the 9.8% average in the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Compass Minerals International's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how Compass Minerals International's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Given the industry it operates in, Compass Minerals International could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.