This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Stericycle Inc (NASDAQ:SRCL)’s return fundamentals and stock market performance.
If you purchase a SRCL share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Stericycle is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for SRCL
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Stericycle’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 Stericycle’s ROCE for you below:
ROCE Calculation for SRCL
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$246m ÷ (US$6.9b – US$749m) = 5.6%
As you can see, SRCL earned $5.6 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which SRCL has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
What is causing this?
SRCL doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of SRCL’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that SRCL weakened investor return on capital employed from 13%. With this, the current earnings of US$246m actually declined from US$544m whilst 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.
ROCE for SRCL investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate SRCL or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for SRCL’s future growth? Take a look at our free research report of analyst consensus for SRCL’s outlook.
- Valuation: What is SRCL 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 SRCL 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.