Posted April 20, 2020
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.
Understanding Return On Capital Employed (ROCE)
has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'." data-reactid="31">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. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)" data-reactid="34">Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Great Lakes Dredge & Dock:
0.14 = US$95m ÷ (US$898m - US$204m) (Based on the trailing twelve months to December 2019.)
Great Lakes Dredge & Dock has an ROCE of 14%." data-reactid="37">Therefore, Great Lakes Dredge & Dock has an ROCE of 14%.
Is Great Lakes Dredge & Dock's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Great Lakes Dredge & Dock's ROCE appears to be substantially greater than the 11% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Great Lakes Dredge & Dock's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Great Lakes Dredge & Dock currently has an ROCE of 14%, compared to its ROCE of 4.2% 3 years ago. This makes us think the business might be improving. The image below shows how Great Lakes Dredge & Dock's ROCE compares to its industry, and you can click it to see more detail on its past growth.
free report on analyst forecasts for Great Lakes Dredge & Dock." data-reactid="54">When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Great Lakes Dredge & Dock.
Do Great Lakes Dredge & Dock's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Great Lakes Dredge & Dock has total assets of US$898m and current liabilities of US$204m. As a result, its current liabilities are equal to approximately 23% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Great Lakes Dredge & Dock's ROCE
but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley." data-reactid="63">Overall, Great Lakes Dredge & Dock has a decent ROCE and could be worthy of further research. There might be better investments than Great Lakes Dredge & Dock out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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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.
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