Examining Fortress Transportation and Infrastructure Investors LLC’s (NYSE:FTAI) Weak Return On Capital Employed

Today we are going to look at Fortress Transportation and Infrastructure Investors LLC (NYSE:FTAI) to see whether it might be an attractive investment prospect. 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. 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.

What is 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. 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.

So, How Do We Calculate ROCE?

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 Fortress Transportation and Infrastructure Investors:

0.025 = US$65m ÷ (US$3.1b – US$553m) (Based on the trailing twelve months to June 2019.)

So, Fortress Transportation and Infrastructure Investors has an ROCE of 2.5%.

Check out our latest analysis for Fortress Transportation and Infrastructure Investors

Is Fortress Transportation and Infrastructure Investors’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Fortress Transportation and Infrastructure Investors’s ROCE appears to be significantly below the 8.8% average in the Trade Distributors industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Fortress Transportation and Infrastructure Investors stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Fortress Transportation and Infrastructure Investors reported an ROCE of 2.5% — better than 3 years ago, when the company didn’t make a profit. That implies the business has been improving. You can see in the image below how Fortress Transportation and Infrastructure Investors’s ROCE compares to its industry.

NYSE:FTAI Past Revenue and Net Income, October 2nd 2019
NYSE:FTAI Past Revenue and Net Income, October 2nd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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.

Fortress Transportation and Infrastructure Investors’s Current Liabilities And Their Impact On Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Fortress Transportation and Infrastructure Investors has total liabilities of US$553m and total assets of US$3.1b. As a result, its current liabilities are equal to approximately 18% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On Fortress Transportation and Infrastructure Investors’s ROCE

Fortress Transportation and Infrastructure Investors has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than Fortress Transportation and Infrastructure Investors. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Fortress Transportation and Infrastructure Investors better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.