Today we are going to look at Global Payments Inc. (NYSE:GPN) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 Global Payments:
0.023 = US$939m ÷ (US$45b – US$4.3b) (Based on the trailing twelve months to September 2019.)
Therefore, Global Payments has an ROCE of 2.3%.
Is Global Payments’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Global Payments’s ROCE is meaningfully below the IT industry average of 12%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Global Payments’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Global Payments’s current ROCE of 2.3% is lower than 3 years ago, when the company reported a 6.2% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Global Payments’s ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Global Payments.
Global Payments’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Global Payments has current liabilities of US$4.3b and total assets of US$45b. As a result, its current liabilities are equal to approximately 9.5% of its total assets. Global Payments has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Global Payments’s ROCE
Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better investment than Global Payments. 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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