Today we’ll look at Smart Sand, Inc. (NASDAQ:SND) 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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’.
So, How Do We Calculate ROCE?
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 Smart Sand:
0.12 = US$19m ÷ (US$327m – US$31m) (Based on the trailing twelve months to September 2018.)
So, Smart Sand has an ROCE of 12%.
Does Smart Sand Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Smart Sand’s ROCE appears to be substantially greater than the 6.3% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Smart Sand’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Smart Sand’s current ROCE of 12% is lower than 3 years ago, when the company reported a 21% ROCE. So investors might consider if it has had issues recently.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Remember that most companies like Smart Sand are cyclical businesses. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Smart Sand.
How Smart Sand’s Current Liabilities Impact Its 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.
Smart Sand has total assets of US$327m and current liabilities of US$31m. As a result, its current liabilities are equal to approximately 9.6% of its total assets. With low current liabilities, Smart Sand’s decent ROCE looks that much more respectable.
The Bottom Line On Smart Sand’s ROCE
This is good to see, and while better prospects may exist, Smart Sand seems worth researching further. You might be able to find a better buy than Smart Sand. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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 email@example.com.