Today we’ll evaluate Spirit AeroSystems Holdings, Inc. (NYSE:SPR) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Spirit AeroSystems Holdings:
0.21 = US$960m ÷ (US$6.3b – US$1.8b) (Based on the trailing twelve months to March 2019.)
Therefore, Spirit AeroSystems Holdings has an ROCE of 21%.
Does Spirit AeroSystems Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Spirit AeroSystems Holdings’s ROCE appears to be substantially greater than the 12% average in the Aerospace & Defense industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Spirit AeroSystems Holdings’s ROCE is currently very good.
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. 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 Spirit AeroSystems Holdings.
How Spirit AeroSystems Holdings’s Current Liabilities Impact 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. 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.
Spirit AeroSystems Holdings has total assets of US$6.3b and current liabilities of US$1.8b. As a result, its current liabilities are equal to approximately 28% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Spirit AeroSystems Holdings’s ROCE
Low current liabilities and high ROCE is a good combination, making Spirit AeroSystems Holdings look quite interesting. Spirit AeroSystems Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.