Why Hyster-Yale Materials Handling, Inc.’s (NYSE:HY) Return On Capital Employed Looks Uninspiring

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Today we are going to look at Hyster-Yale Materials Handling, Inc. (NYSE:HY) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

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

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. 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’.

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 Hyster-Yale Materials Handling:

0.023 = US$24m ÷ (US$1.9b – US$858m) (Based on the trailing twelve months to March 2019.)

So, Hyster-Yale Materials Handling has an ROCE of 2.3%.

See our latest analysis for Hyster-Yale Materials Handling

Is Hyster-Yale Materials Handling’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Hyster-Yale Materials Handling’s ROCE appears meaningfully below the 11% average reported by the Machinery industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Hyster-Yale Materials Handling 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.

As we can see, Hyster-Yale Materials Handling currently has an ROCE of 2.3%, less than the 15% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

NYSE:HY Past Revenue and Net Income, May 4th 2019
NYSE:HY Past Revenue and Net Income, May 4th 2019

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Hyster-Yale Materials Handling’s Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Hyster-Yale Materials Handling has total assets of US$1.9b and current liabilities of US$858m. As a result, its current liabilities are equal to approximately 46% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Hyster-Yale Materials Handling’s low ROCE is unappealing.

Our Take On Hyster-Yale Materials Handling’s ROCE

This company may not be the most attractive investment prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Hyster-Yale Materials Handling 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.