Today we'll look at Booking Holdings Inc. (NASDAQ:BKNG) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 Booking Holdings:
0.33 = US$5.3b ÷ (US$21b - US$5.5b) (Based on the trailing twelve months to September 2019.)
Therefore, Booking Holdings has an ROCE of 33%.
Does Booking Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Booking Holdings's ROCE appears to be substantially greater than the 6.5% average in the Online Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Booking Holdings's ROCE in absolute terms currently looks quite high.
In our analysis, Booking Holdings's ROCE appears to be 33%, compared to 3 years ago, when its ROCE was 22%. This makes us think the business might be improving. You can see in the image below how Booking Holdings's ROCE compares to its industry. Click to see more on past growth.
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. 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 Booking Holdings.
Booking Holdings's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Booking Holdings has total liabilities of US$5.5b and total assets of US$21b. As a result, its current liabilities are equal to approximately 26% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From Booking Holdings's ROCE
This is good to see, and with such a high ROCE, Booking Holdings may be worth a closer look. There might be better investments than Booking Holdings 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.