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Are RBC Bearings Incorporated’s Returns On Capital Worth Investigating?

Today we are going to look at RBC Bearings Incorporated (NASDAQ:ROLL) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 RBC Bearings:

0.14 = US\$153m ÷ (US\$1.2b – US\$84m) (Based on the trailing twelve months to December 2018.)

Therefore, RBC Bearings has an ROCE of 14%.

Is RBC Bearings’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, RBC Bearings’s ROCE appears to be around the 12% average of the Machinery industry. Separate from RBC Bearings’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, RBC Bearings currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 11%. This makes us think about whether the company has been reinvesting shrewdly.

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for RBC Bearings.

Do RBC Bearings’s Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

RBC Bearings has total liabilities of US\$84m and total assets of US\$1.2b. Therefore its current liabilities are equivalent to approximately 7.1% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), RBC Bearings earns a sound return on capital employed.

What We Can Learn From RBC Bearings’s ROCE

If it is able to keep this up, RBC Bearings could be attractive. Of course you might be able to find a better stock than RBC Bearings. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like RBC Bearings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.