Today we’ll evaluate The Interpublic Group of Companies, Inc. (NYSE:IPG) to determine whether it could have potential as an investment idea. 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Interpublic Group of Companies:
0.13 = US$1.1b ÷ (US$18b – US$9.4b) (Based on the trailing twelve months to December 2019.)
So, Interpublic Group of Companies has an ROCE of 13%.
Does Interpublic Group of Companies Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Interpublic Group of Companies’s ROCE is meaningfully better than the 8.9% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Interpublic Group of Companies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Interpublic Group of Companies’s current ROCE of 13% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Interpublic Group of Companies’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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.
Interpublic Group of Companies’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Interpublic Group of Companies has total assets of US$18b and current liabilities of US$9.4b. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Interpublic Group of Companies’s current liabilities are fairly high, which increases its ROCE significantly.
The Bottom Line On Interpublic Group of Companies’s ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Interpublic Group of Companies 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.
I will like Interpublic Group of Companies 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 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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