Today we are going to look at Performance Food Group Company (NYSE:PFGC) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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 Performance Food Group:
0.068 = US$296m ÷ (US$6.2b – US$1.8b) (Based on the trailing twelve months to September 2019.)
Therefore, Performance Food Group has an ROCE of 6.8%.
Is Performance Food Group’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Performance Food Group’s ROCE appears to be significantly below the 8.6% average in the Consumer Retailing industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Performance Food Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Performance Food Group’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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Performance Food Group.
What Are Current Liabilities, And How Do They Affect Performance Food Group’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.
Performance Food Group has total liabilities of US$1.8b and total assets of US$6.2b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Performance Food Group’s ROCE
That said, Performance Food Group’s ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Performance Food Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Performance Food Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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