Why We’re Not Impressed By Waste Connections, Inc.’s (NYSE:WCN) 7.0% ROCE

Today we are going to look at Waste Connections, Inc. (NYSE:WCN) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

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. 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 Waste Connections:

0.07 = US$932m ÷ (US$14b - US$990m) (Based on the trailing twelve months to March 2020.)

Therefore, Waste Connections has an ROCE of 7.0%.

Check out our latest analysis for Waste Connections

Is Waste Connections's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Waste Connections's ROCE is meaningfully below the Commercial Services industry average of 10%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Waste Connections's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

You can see in the image below how Waste Connections's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Waste Connections'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Waste Connections has total assets of US$14b and current liabilities of US$990m. As a result, its current liabilities are equal to approximately 6.9% of its total assets. Waste Connections has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

The Bottom Line On Waste Connections's ROCE

If performance improves, then Waste Connections may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than Waste Connections. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Waste Connections better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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