Is Kirby Corporation (NYSE:KEX) Investing Effectively In Its Business?

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Today we are going to look at Kirby Corporation (NYSE:KEX) to see whether it might be an attractive investment prospect. 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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 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.’

How Do You Calculate Return On Capital Employed?

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 Kirby:

0.046 = US$241m ÷ (US$5.9b – US$568m) (Based on the trailing twelve months to December 2018.)

So, Kirby has an ROCE of 4.6%.

Check out our latest analysis for Kirby

Does Kirby Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Kirby’s ROCE is around the 5.1% average reported by the Shipping industry. Independently of how Kirby compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.

Kirby’s current ROCE of 4.6% is lower than 3 years ago, when the company reported a 10% ROCE. This makes us wonder if the business is facing new challenges.

NYSE:KEX Last Perf February 7th 19
NYSE:KEX Last Perf February 7th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 Kirby.

What Are Current Liabilities, And How Do They Affect Kirby’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.

Kirby has total liabilities of US$568m and total assets of US$5.9b. Therefore its current liabilities are equivalent to approximately 9.7% of its total assets. Kirby has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Kirby’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course you might be able to find a better stock than Kirby. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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 editorial-team@simplywallst.com.