Today we’ll look at GP Strategies Corporation (NYSE:GPX) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 GP Strategies:
0.093 = US$25m ÷ (US$401m – US$176m) (Based on the trailing twelve months to September 2018.)
So, GP Strategies has an ROCE of 9.3%.
See our latest analysis for GP Strategies
Is GP Strategies’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, GP Strategies’s ROCE appears to be significantly below the 12% average in the Professional Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, GP Strategies’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
GP Strategies’s current ROCE of 9.3% is lower than its ROCE in the past, which was 19%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for GP Strategies.
What Are Current Liabilities, And How Do They Affect GP Strategies’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) unfairly boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
GP Strategies has total assets of US$401m and current liabilities of US$176m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. GP Strategies has a medium level of current liabilities, which would boost its ROCE somewhat.
What We Can Learn From GP Strategies’s ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. A good or bad ROCE tells us something about a business, but we need to do more research before making a purchase. For example you might check if insiders are buying shares.
If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.
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.