Today we are going to look at Expedia Group, Inc. (NASDAQ:EXPE) 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.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In the end, ROCE is a valuable metric that has its flaws. 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 Expedia Group:
0.07 = US$667m ÷ (US$19b – US$8.8b) (Based on the trailing twelve months to September 2018.)
So, Expedia Group has an ROCE of 7.0%.
Is Expedia Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Expedia Group’s ROCE appears meaningfully below the 9.1% average reported by the Online Retail industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Expedia Group stacks up against its industry, its ROCE in absolute terms is mediocre; not much better than the returns on government bonds. It is possible that there are more rewarding investments out there.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 Expedia Group.
Expedia Group’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) unfairly boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Expedia Group has total assets of US$19b and current liabilities of US$8.8b. As a result, its current liabilities are equal to approximately 46% of its total assets. Expedia Group’s ROCE is improved somewhat by its moderate amount of current liabilities.
The Bottom Line On Expedia Group’s ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. A good or bad ROCE tells us something about a business, but we need to do more research before making a purchase. For example, I often check if insiders have been buying shares .
Of course Expedia Group may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
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 firstname.lastname@example.org.