Is Genesee & Wyoming Inc. (NYSE:GWR) Investing Your Capital Efficiently?

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Today we are going to look at Genesee & Wyoming Inc. (NYSE:GWR) 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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.’

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 Genesee & Wyoming:

0.054 = US$424m ÷ (US$8.4b – US$542m) (Based on the trailing twelve months to March 2019.)

Therefore, Genesee & Wyoming has an ROCE of 5.4%.

See our latest analysis for Genesee & Wyoming

Does Genesee & Wyoming Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Genesee & Wyoming’s ROCE is meaningfully below the Transportation industry average of 11%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Genesee & Wyoming’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

NYSE:GWR Past Revenue and Net Income, June 14th 2019
NYSE:GWR Past Revenue and Net Income, June 14th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Genesee & Wyoming.

Genesee & Wyoming’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 counter this, investors can check if a company has high current liabilities relative to total assets.

Genesee & Wyoming has total assets of US$8.4b and current liabilities of US$542m. As a result, its current liabilities are equal to approximately 6.5% of its total assets. Genesee & Wyoming has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Genesee & Wyoming’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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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.