In This Article:
Today we'll evaluate IDP Education Limited (ASX:IEL) 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 up, we'll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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?
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 IDP Education:
0.43 = AU$97m ÷ (AU$369m - AU$142m) (Based on the trailing twelve months to June 2019.)
So, IDP Education has an ROCE of 43%.
Check out our latest analysis for IDP Education
Is IDP Education's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that IDP Education's ROCE is meaningfully better than the 9.2% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, IDP Education's ROCE is currently very good.
IDP Education's current ROCE of 43% is lower than 3 years ago, when the company reported a 65% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how IDP Education's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.