Today we’ll evaluate Beacon Roofing Supply, Inc. (NASDAQ:BECN) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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 measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.’
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 Beacon Roofing Supply:
0.052 = US$259m ÷ (US$6.5b – US$1.5b) (Based on the trailing twelve months to September 2018.)
So, Beacon Roofing Supply has an ROCE of 5.2%.
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Does Beacon Roofing Supply Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Beacon Roofing Supply’s ROCE appears meaningfully below the 7.9% average reported by the Trade Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Beacon Roofing Supply compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.
Beacon Roofing Supply’s current ROCE of 5.2% is lower than its ROCE in the past, which was 11%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Beacon Roofing Supply.
What Are Current Liabilities, And How Do They Affect Beacon Roofing Supply’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
Beacon Roofing Supply has total liabilities of US$1.5b and total assets of US$6.5b. Therefore its current liabilities are equivalent to approximately 23% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
The Bottom Line On Beacon Roofing Supply’s ROCE
That’s not a bad thing, however Beacon Roofing Supply has a weak ROCE and may not be an attractive investment. But note: Beacon Roofing Supply 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.