Today we’ll look at Insperity, Inc. (NYSE:NSP) 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, 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Insperity:
0.35 = US$187m ÷ (US$1.4b – US$869m) (Based on the trailing twelve months to December 2019.)
Therefore, Insperity has an ROCE of 35%.
Is Insperity’s ROCE Good?
One way to assess ROCE is to compare similar companies. Insperity’s ROCE appears to be substantially greater than the 11% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Insperity’s ROCE in absolute terms currently looks quite high.
You can see in the image below how Insperity’s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Insperity.
What Are Current Liabilities, And How Do They Affect Insperity’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Insperity has current liabilities of US$869m and total assets of US$1.4b. As a result, its current liabilities are equal to approximately 62% of its total assets. While a high level of current liabilities boosts its ROCE, Insperity’s returns are still very good.
Our Take On Insperity’s ROCE
So to us, the company is potentially worth investigating further. There might be better investments than Insperity out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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