I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Sealed Air Corporation (NYSE:SEE).
Buying Sealed Air makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Sealed Air is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
Choosing to invest in Sealed Air comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Sealed Air’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for SEE
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$445.40m ÷ (US$5.04b – US$1.42b) = 12.31%
As you can see, SEE earned $12.3 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which SEE has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
What is causing this?
Although Sealed Air is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, SEE’s ROCE was 8.78%, which means the company’s capital returns have improved. The movement in the earnings variable over this time shows a fall from US$548.90m to US$445.40m, but the use of capital has fallen further due to a decline in total assets employed , which suggests investor’s ROCE has risen because the company requires less capital to create earnings despite the previous decline in EBT.
Although Sealed Air’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate SEE or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for SEE’s future growth? Take a look at our free research report of analyst consensus for SEE’s outlook.
- Valuation: What is SEE worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether SEE is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.