Examining Liberty TripAdvisor Holdings, Inc.’s (NASDAQ:LTRP.A) Weak Return On Capital Employed

Today we are going to look at Liberty TripAdvisor Holdings, Inc. (NASDAQ:LTRP.A) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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 Liberty TripAdvisor Holdings:

0.028 = US$136m ÷ (US$5.5b – US$743m) (Based on the trailing twelve months to September 2019.)

Therefore, Liberty TripAdvisor Holdings has an ROCE of 2.8%.

Check out our latest analysis for Liberty TripAdvisor Holdings

Is Liberty TripAdvisor Holdings’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Liberty TripAdvisor Holdings’s ROCE is meaningfully below the Interactive Media and Services industry average of 9.1%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Liberty TripAdvisor Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

We can see that, Liberty TripAdvisor Holdings currently has an ROCE of 2.8% compared to its ROCE 3 years ago, which was 0.5%. This makes us think about whether the company has been reinvesting shrewdly. Take a look at the image below to see how Liberty TripAdvisor Holdings’s past growth compares to the average in its industry.

NasdaqGS:LTRP.A Past Revenue and Net Income, November 22nd 2019
NasdaqGS:LTRP.A Past Revenue and Net Income, November 22nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Liberty TripAdvisor Holdings’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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Liberty TripAdvisor Holdings has total assets of US$5.5b and current liabilities of US$743m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Liberty TripAdvisor Holdings’s ROCE

That’s not a bad thing, however Liberty TripAdvisor Holdings has a weak ROCE and may not be an attractive investment. You might be able to find a better investment than Liberty TripAdvisor 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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