Should You Like Hubbell Incorporated’s (NYSE:HUBB) High Return On Capital Employed?

Today we’ll evaluate Hubbell Incorporated (NYSE:HUBB) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Hubbell:

0.15 = US$534m ÷ (US$5.0b – US$938m) (Based on the trailing twelve months to September 2018.)

So, Hubbell has an ROCE of 15%.

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Does Hubbell Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Hubbell’s ROCE appears to be substantially greater than the 11% average in the Electrical industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Hubbell compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

NYSE:HUBB Last Perf January 29th 19
NYSE:HUBB Last Perf January 29th 19

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Hubbell’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Hubbell has total assets of US$5.0b and current liabilities of US$938m. As a result, its current liabilities are equal to approximately 19% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Hubbell’s ROCE

Overall, Hubbell has a decent ROCE and could be worthy of further research. Of course you might be able to find a better stock than Hubbell. So you may wish to see this free collection of other companies that have grown earnings strongly.

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

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 editorial-team@simplywallst.com.