Is Gencor Industries, Inc. (NASDAQ:GENC) Creating Value For Shareholders?

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Today we’ll look at Gencor Industries, Inc. (NASDAQ:GENC) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

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. Ultimately, it is a useful but imperfect metric. 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’.

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 Gencor Industries:

0.10 = US$16m ÷ (US$161m – US$8.5m) (Based on the trailing twelve months to March 2019.)

So, Gencor Industries has an ROCE of 10%.

Check out our latest analysis for Gencor Industries

Does Gencor Industries Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Gencor Industries’s ROCE appears to be around the 11% average of the Machinery industry. Separate from how Gencor Industries stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Our data shows that Gencor Industries currently has an ROCE of 10%, compared to its ROCE of 2.9% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

NasdaqGM:GENC Past Revenue and Net Income, June 24th 2019
NasdaqGM:GENC Past Revenue and Net Income, June 24th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Gencor Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Gencor Industries’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. 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.

Gencor Industries has total liabilities of US$8.5m and total assets of US$161m. As a result, its current liabilities are equal to approximately 5.3% of its total assets. Gencor Industries has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

The Bottom Line On Gencor Industries’s ROCE

Based on this information, Gencor Industries appears to be a mediocre business. Of course, you might also be able to find a better stock than Gencor Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.