Today we’ll evaluate IAC/InterActiveCorp (NASDAQ:IAC) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. 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.
What is 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 IAC/InterActiveCorp:
0.087 = US$641m ÷ (US$8.3b – US$953m) (Based on the trailing twelve months to June 2019.)
Therefore, IAC/InterActiveCorp has an ROCE of 8.7%.
Is IAC/InterActiveCorp’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that IAC/InterActiveCorp’s ROCE is fairly close to the Interactive Media and Services industry average of 8.7%. Aside from the industry comparison, IAC/InterActiveCorp’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that , IAC/InterActiveCorp currently has an ROCE of 8.7% compared to its ROCE 3 years ago, which was 6.8%. This makes us think the business might be improving.
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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for IAC/InterActiveCorp.
What Are Current Liabilities, And How Do They Affect IAC/InterActiveCorp’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
IAC/InterActiveCorp has total liabilities of US$953m and total assets of US$8.3b. As a result, its current liabilities are equal to approximately 11% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From IAC/InterActiveCorp’s ROCE
With that in mind, we’re not overly impressed with IAC/InterActiveCorp’s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than IAC/InterActiveCorp. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like IAC/InterActiveCorp better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.