Today we’ll look at EchoStar Corporation (NASDAQ:SATS) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. 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.’
How Do You Calculate Return On Capital Employed?
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 EchoStar:
0.035 = US$210m ÷ (US$8.9b – US$1.4b) (Based on the trailing twelve months to September 2018.)
Therefore, EchoStar has an ROCE of 3.5%.
Does EchoStar Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, EchoStar’s ROCE appears to be significantly below the 7.5% average in the Communications industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how EchoStar compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. It is likely that there are more attractive prospects out there.
As we can see, EchoStar currently has an ROCE of 3.5%, less than the 5.1% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for EchoStar.
Do EchoStar’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
EchoStar has total assets of US$8.9b and current liabilities of US$1.4b. Therefore its current liabilities are equivalent to approximately 16% 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 EchoStar’s ROCE
EchoStar has a poor ROCE, and there may be better investment prospects out there. We prefer high ROCE ratios over lower ones, but a weaker business can also be rewarding if it has managers with skin in the game. It could be worth checking if insiders have been buying or selling .
If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity 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.