Today we’ll look at Silgan Holdings Inc. (NASDAQ:SLGN) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Silgan Holdings:
0.12 = US$418m ÷ (US$4.6b – US$1.1b) (Based on the trailing twelve months to December 2018.)
Therefore, Silgan Holdings has an ROCE of 12%.
Does Silgan Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Silgan Holdings’s ROCE is around the 12% average reported by the Packaging industry. Independently of how Silgan Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
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. 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 Silgan Holdings.
How Silgan Holdings’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Silgan Holdings has total liabilities of US$1.1b and total assets of US$4.6b. As a result, its current liabilities are equal to approximately 24% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Silgan Holdings’s ROCE
This is good to see, and with a sound ROCE, Silgan Holdings could be worth a closer look. You might be able to find a better buy than Silgan Holdings. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.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.