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Today we'll look at Rayonier Advanced Materials Inc. (NYSE:RYAM) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 Rayonier Advanced Materials:
0.066 = US$153m ÷ (US$2.7b - US$329m) (Based on the trailing twelve months to March 2019.)
Therefore, Rayonier Advanced Materials has an ROCE of 6.6%.
View our latest analysis for Rayonier Advanced Materials
Is Rayonier Advanced Materials's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Rayonier Advanced Materials's ROCE is meaningfully below the Chemicals industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Rayonier Advanced Materials'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.
Rayonier Advanced Materials's current ROCE of 6.6% is lower than its ROCE in the past, which was 15%, 3 years ago. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.