Today we are going to look at Rogers Communications Inc. (TSE:RCI.B) 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. Then we’ll compare its ROCE to similar companies. 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Rogers Communications:
0.15 = CA$3.8b ÷ (CA$32b – CA$6.8b) (Based on the trailing twelve months to December 2018.)
So, Rogers Communications has an ROCE of 15%.
Is Rogers Communications’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Rogers Communications’s ROCE is meaningfully higher than the 6.8% average in the Wireless Telecom industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Rogers Communications compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Rogers Communications’s ROCE appears to be 15%, compared to 3 years ago, when its ROCE was 11%. This makes us think about whether the company has been reinvesting shrewdly.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Rogers Communications’s Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Rogers Communications has total liabilities of CA$6.8b and total assets of CA$32b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Rogers Communications’s ROCE
With that in mind, Rogers Communications’s ROCE appears pretty good. But note: Rogers Communications may not be the best stock to buy. 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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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. Thank you for reading.