Is There More To Globe International Limited (ASX:GLB) Than Its 7.7% Returns On Capital?

Today we’ll evaluate Globe International Limited (ASX:GLB) 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 up, we’ll look at what ROCE is and how we calculate it. 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 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. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

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 Globe International:

0.077 = AU$4.1m ÷ (AU$82m – AU$29m) (Based on the trailing twelve months to December 2019.)

So, Globe International has an ROCE of 7.7%.

View our latest analysis for Globe International

Does Globe International Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Globe International’s ROCE appears to be around the 9.6% average of the Luxury industry. Setting aside the industry comparison for now, Globe International’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

We can see that, Globe International currently has an ROCE of 7.7%, less than the 15% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Globe International’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

ASX:GLB Past Revenue and Net Income, March 16th 2020
ASX:GLB Past Revenue and Net Income, March 16th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. How cyclical is Globe International? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Globe International’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Globe International has current liabilities of AU$29m and total assets of AU$82m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. Globe International’s ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On Globe International’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

Globe International is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.