Today we are going to look at Sensient Technologies Corporation (NYSE:SXT) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Sensient Technologies:
0.10 = US$156m ÷ (US$1.7b – US$201m) (Based on the trailing twelve months to December 2019.)
So, Sensient Technologies has an ROCE of 10%.
Does Sensient Technologies Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Sensient Technologies’s ROCE is around the 8.9% average reported by the Chemicals industry. Regardless of where Sensient Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Sensient Technologies’s current ROCE of 10% is lower than its ROCE in the past, which was 15%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Sensient Technologies’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sensient Technologies.
What Are Current Liabilities, And How Do They Affect Sensient Technologies’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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sensient Technologies has current liabilities of US$201m and total assets of US$1.7b. As a result, its current liabilities are equal to approximately 12% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Sensient Technologies’s ROCE
With that in mind, Sensient Technologies’s ROCE appears pretty good. Sensient Technologies looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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