Is There More To Willis Lease Finance Corporation (NASDAQ:WLFC) Than Its 7.1% Returns On Capital?

Today we are going to look at Willis Lease Finance Corporation (NASDAQ:WLFC) 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.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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’.

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 Willis Lease Finance:

0.071 = US$127m ÷ (US$1.9b – US$137m) (Based on the trailing twelve months to December 2018.)

Therefore, Willis Lease Finance has an ROCE of 7.1%.

View our latest analysis for Willis Lease Finance

Is Willis Lease Finance’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Willis Lease Finance’s ROCE is fairly close to the Trade Distributors industry average of 8.1%. Aside from the industry comparison, Willis Lease Finance’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Our data shows that Willis Lease Finance currently has an ROCE of 7.1%, compared to its ROCE of 4.6% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.

NasdaqGM:WLFC Past Revenue and Net Income, April 3rd 2019
NasdaqGM:WLFC Past Revenue and Net Income, April 3rd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Willis Lease Finance? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Willis Lease Finance’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Willis Lease Finance has total liabilities of US$137m and total assets of US$1.9b. As a result, its current liabilities are equal to approximately 7.1% of its total assets. Willis Lease Finance reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

The Bottom Line On Willis Lease Finance’s ROCE

Willis Lease Finance looks like an ok business, but on this analysis it is not at the top of our buy list. But note: Willis Lease Finance 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).

I will like Willis Lease Finance 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.