Today we’ll evaluate U.S. Silica Holdings, Inc. (NYSE:SLCA) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for U.S. Silica Holdings:
0.063 = US$169m ÷ (US$3.3b – US$286m) (Based on the trailing twelve months to September 2018.)
So, U.S. Silica Holdings has an ROCE of 6.3%.
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Is U.S. Silica Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, U.S. Silica Holdings’s ROCE appears to be around the 6.3% average of the Energy Services industry. Aside from the industry comparison, U.S. Silica Holdings’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.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like U.S. Silica Holdings are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for U.S. Silica Holdings.
What Are Current Liabilities, And How Do They Affect U.S. Silica Holdings’s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
U.S. Silica Holdings has total liabilities of US$286m and total assets of US$3.3b. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. With low levels of current liabilities, at least U.S. Silica Holdings’s mediocre ROCE is not unduly boosted.
What We Can Learn From U.S. Silica Holdings’s ROCE
U.S. Silica Holdings looks like an ok business, but on this analysis it is not at the top of our buy list. Of course you might be able to find a better stock than U.S. Silica Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like U.S. Silica Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.