This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in United Technologies Corporation (NYSE:UTX).
Buying United Technologies makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to UTX’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in United Technologies, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Calculating Return On Capital Employed for UTX
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at United Technologies’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated United Technologies’s ROCE for you below:
ROCE Calculation for UTX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$7.44b ÷ (US$101.57b – US$25.07b) = 9.72%
The calculation above shows that UTX’s earnings were 9.72% of capital employed. This shows United Technologies provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if UTX is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
Why is this the case?
United Technologies’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment United Technologies is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of UTX’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that UTX weakened investor return on capital employed from 12.39%. Over the same period, EBT went from US$8.56b to US$7.44b and capital employed has increased due to an increase in total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
United Technologies’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for UTX’s future growth? Take a look at our free research report of analyst consensus for UTX’s outlook.
- Valuation: What is UTX worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether UTX is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org.