Is Casey’s General Stores, Inc.’s (NASDAQ:CASY) Capital Allocation Ability Worth Your Time?

Today we’ll look at Casey’s General Stores, Inc. (NASDAQ:CASY) and reflect on its potential as an investment. 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.

Firstly, 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 ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Casey’s General Stores:

0.099 = US$308m ÷ (US$3.6b – US$464m) (Based on the trailing twelve months to January 2019.)

Therefore, Casey’s General Stores has an ROCE of 9.9%.

View our latest analysis for Casey’s General Stores

Does Casey’s General Stores Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Casey’s General Stores’s ROCE is around the 9.9% average reported by the Consumer Retailing industry. Setting aside the industry comparison for now, Casey’s General Stores’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.

Casey’s General Stores’s current ROCE of 9.9% is lower than 3 years ago, when the company reported a 17% ROCE. So investors might consider if it has had issues recently.

NasdaqGS:CASY Past Revenue and Net Income, April 22nd 2019
NasdaqGS:CASY Past Revenue and Net Income, April 22nd 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Casey’s General Stores.

What Are Current Liabilities, And How Do They Affect Casey’s General Stores’s 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.

Casey’s General Stores has total liabilities of US$464m and total assets of US$3.6b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Casey’s General Stores’s ROCE

If Casey’s General Stores continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Casey’s General Stores better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.