In This Article:
Today we'll look at Regional Express Holdings Limited (ASX:REX) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Regional Express Holdings:
0.12 = AU$24m ÷ (AU$273m - AU$61m) (Based on the trailing twelve months to June 2019.)
Therefore, Regional Express Holdings has an ROCE of 12%.
Check out our latest analysis for Regional Express Holdings
Is Regional Express Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Regional Express Holdings's ROCE is around the 9.6% average reported by the Airlines industry. Regardless of where Regional Express Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Regional Express Holdings currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 2.7%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Regional Express Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Regional Express Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Regional Express Holdings's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.