In This Article:
Today we'll look at James Cropper PLC (LON:CRPR) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. 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 James Cropper:
0.054 = UK£2.9m ÷ (UK£69m - UK£16m) (Based on the trailing twelve months to March 2019.)
Therefore, James Cropper has an ROCE of 5.4%.
See our latest analysis for James Cropper
Is James Cropper's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, James Cropper's ROCE appears meaningfully below the 9.4% average reported by the Forestry industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how James Cropper stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
James Cropper's current ROCE of 5.4% is lower than its ROCE in the past, which was 12%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how James Cropper'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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for James Cropper.